China’s interest rate and stimulus cuts are great news for this Vanguard ETF, which just hit an all-time high and may have more room to run

China has launched a stimulus package that includes lower reserve requirements for banks, lower interest rates, measures to encourage share repurchases, relief for homebuyers and more.

Chinese stocks and ETFs – many of which are underperforming S&P500 has increased significantly in recent years – increased in response to this news. But it was the same Vanguard Materials ETF (VAW -0.40%)which reached a new all-time daily record on Friday.

Here’s an introduction to ETFs and why you should buy them now.

Staff supporting economic growth

Leading players in the materials sector are companies such as Linde, Sherwin-WilliamsAND Ecolab. These companies are big, but they simply don’t measure up to the giants in sectors like technology, finance or health care. There are also many mid- and small-cap companies in this sector. Such a company Louisiana-Pacific may not appear on most investors’ radars. However, this construction products and equipment company is an industry leader, and its market capitalization has increased several times over the last decade.

Of the stock market’s 11 sectors, the materials sector has the lowest weight in the S&P 500 at just 2.2%. But don’t let its small impact on the S&P 500 distract you from the sector’s importance to global economic growth.

Despite its lack of glitz and glamour, the materials sector acts as the picks and shovels of economic growth. Includes chemical companies; miners of steel, copper, silver and gold; packaging, paper and plastics companies; manufacturers of building materials; fertilizer producers; and more.

Like other cyclical sectors, materials are highly dependent on commodity prices. Oversupply can lead to lower prices and weaker margins. However, higher demand may justify increased supply and capital investment.

Higher interest rates could discourage capital investment and slow economic growth, weakening global demand for materials. So the Federal Reserve’s decision to cut interest rates and China’s stimulus package is potentially great news for the sector – especially given China’s industrial-heavy economy.

ETFs are beneficial for commodity-dependent sectors

The Vanguard Materials ETF has an expense ratio of just 0.1% – or $1 for every $1,000 invested. It also has a minimum investment amount of $1, which makes it a convenient way to diversify without committing a lot of capital. The ETF has a price-to-earnings ratio of just 16.6 and a yield of 1.6% – which is a much lower valuation than the S&P 500 and a slightly higher yield.

There are certain market sectors where ETFs can be particularly effective tools for achieving diversification, and materials is one of them. The Vanguard Materials ETF is a simple way to invest in the higher demand for chemicals and commodities that power the modern economy. If you don’t closely follow commodity prices and the materials sector, competitive advantage, say, Dow Inc. compared to LyondellBasell may not be visible. So the fund’s 100-plus holdings are a good choice for investors interested in overall economic growth and higher consumption, rather than just one industry such as copper or chemicals.

In this respect, the materials sector is similar to the utilities sector, whose leading players have footholds in specific geographic regions. Investing in Vanguard Utility ETF provides access to electricity, water and gas utilities in multiple locations, instead of betting on just a few players.

To summarize, ETFs can be excellent tools for investing in commodity-focused sectors such as materials, utilities and energy.

A value ETF for risk-tolerant investors

As in any sector, certain materials companies stand out as particularly good buys. Still, for most investors, an ETF that provides exposure to several industries rather than just one aspect of a sector will be a better choice.

The low cost profile and low minimum investment requirements for the Vanguard Materials ETF make it an ideal fund for investors who should consider whether they are optimistic that lower interest rates will help accelerate growth while allowing economic powerhouses like the U.S. and China avoiding recession.

That said, it’s worth understanding that materials inventories can be volatile during periods of high uncertainty or economic downturns. Over the last five years, the Vanguard Materials ETF’s maximum decline was 41.1%, which means the ETF has fallen that far from its high. The maximum decline over the last three years was 25.5% – which doesn’t even take into account the pandemic sell-off.

In summary, you should only consider the Vanguard Materials ETF if you don’t mind the volatile nature of the sector.

Daniel Foelber has no position in any of the companies mentioned. The Motley Fool takes positions on and recommends Linde. The Motley Fool recommends Ecolab and Sherwin-Williams. The Motley Fool has a disclosure policy.