The diamond market is very volatile. Since global diamond production is declining and prospects of finding new mines are slim, this may lead to a solid reason that a diamond ETF may be just what the gem market needs. If you can’t wait for a diamond ETF, there are indirect ways to get diamond exposure:

• iShares S&P Global Materials (NYSEArca: MXI)

• iShares MSCI Australia Index (NYSEArca: EWA)

Another aspect that the diamond industry has going for it is the widening middle class in China, India and other emerging markets. Kevin Grewal for The Street explains that some analysts and diamond experts suggest that valuations of diamond stocks appear to be relatively cheap. [Where Is that Diamond ETF?]

Meanwhile, the rough diamond market is showing signs of rebounding and if investors are cooperative in financing diamond mining and exploration, the industry could begin to sparkle.

For more stories about diamonds, visit our diamonds category.

Emerging market economies are expanding to their own tune and they are demanding more commodities to fuel that growth, which will put upward pressure on commodity prices for everyone, writes Harold L. Sirkin for BusinessWeek. [4 reasons to watch emerging markets.]

It should also be noted that besides the basic laws of supply and demand, there are some other factors that will also contribute to the rising cost of commodities:

• A rising middle class in rapidly developing emerging economies. Around a billion people have moved out of poverty and entered the growing ranks of consumers. The growing number of people purchasing more stuff is increasing the amount of basic commodities being consumed. And the trend will likely continue. Experts believe that as many as two billion people may join the middle-class by 2030. [What CFTC's proposal may mean.]
• Large-scale infrastructure investments in emerging economies. The large swaths of new workers in the market has prompted the need for more infrastructure projects to accommodate the movement of the masses. It is calculated that developing countries alone will account for $2.25 trillion annually over the next three years to meet infrastructure needs, which again will affect the demand for, and prices of, commodities and raw materials that will be used for the projects. [Will platinum and palladium outshine gold?]
• The emergence of a large low-income-consumer base. Many of these consumers until recently were struggling just to feed themselves. Today, they have jobs and while they’re still poor, their quality of life has improved. They’re buying tractors for the first time, moving up from bicycles to cars or scooters and getting cell phones. [Why commodity ETFs underperformed spot markets.]

For more information on commodities, visit our commodity category.

• SPDR Select Sector Fund- Basic Industries (NYSEArca: XLB)

• iShares Dow Jones U.S. Basic Materials (NYSEArca: IYM)

• iShares S&P Global Materials Sector Index Fund (NYSEArca: MXI)

• iShares S&P GSCI Commodity-Indexed Trust (NYSEArca: GSG)

Max Chen contributed to this article.

Investors looking to supplement a sector-diversified core U.S. equities stock holdings have several materials ETFs to choose from, including Materials Select Sector SPDR (NYSEArca: XLB), iShares Dow Jones U.S. Basic Materials (NYSEArca: IYM), Vanguard Materials ETF (NYSEArca: VAW), or iShares S&P Global Materials (NYSEArca: MXI) because of their favorable trading liquidity, expense ratio and yield, remarks Richard Shaw for Seeking Alpha.

When looking at any sector or group of ETFs, it’s important to mind several things:

• Liquidity. When you’re placing smaller orders as an individual investor, it’s important to take into account asset size and trading volume to ensure you can trade when you need to, and at a good price.
• Expenses. What’s the cost of the funds? XLB is 0.22%; IYM is 0.47%; VAW is 0.25%; and MXI is 0.48%.
• Holdings. Potential investors should also look into a fund’s holdings. XLB is the most concentrated and least diversified, IYM and VAM are successively less concentrated and more diversified, and MXI is the least concentrated. XLB holds materials companies within the S&P 500, IYM and VAW have expanded out of the S&P. MXI is the only one that has non-U.S. holdings. [How to find ETF holdings.]
• Yield. If you worry about total returns from dividend yields, it is a good idea to compare yields – yield is distributions divided by current ETF price. Lower expense ratios also result in higher fund dividends and higher total returns. All four mentioned funds have decent yields, but MXI is currently trailing the group. The yield trend shows that the four funds paid a significantly lower dividend in 2009 than in 2008. A recovering world economy will eventually translate into improved dividend yields.

Which one is best? That’s up to you. Is cost a major concern? Or is it diversity within the holdings? Perhaps you want a non-U.S. allocation. By looking at the above criteria for these or other ETFs, you can help narrow down your list of potentials to reveal one clear winner.

For more information on materials, visit our basic materials category.

• Materials Select Sector SPDR (NYSEArca: XLB): up 48.1% in 2009

• iShares Dow Jones U.S. Basic Materials (NYSEArca: IYM): up 64.4% in 2009

• Vanguard Materials ETF (NYSEArca: VAW): up 51.4% in 2009

• iShares S&P Global Materials (NYSEArca: MXI): up 60.4% in 2009

Max Chen contributed to this article.

Basic materials include such things as chemical products, forestry products and the mining and refining of metals.  They are also the providers of the raw building blocks of construction and infrastructure.  When you sit and back and assess the health of the global economy over the next few years, it lies in infrastructure and public works, states Andrew Leckey for The Chicago Tribune.  Stimulus packages in China as well as here in the United States have massive amounts of money allocated to these two areas.

Basic materials can be a great way to access the overall global economic recovery, especially for investors who may not want the volatility of a single-country emerging market fund.  To grab exposure to basic materials, take a look at the following ETFs:

• SPDR Select Sector Fund- Basic Industries (XLB): up 14.4% year-to-date

• iShares Dow Jones U.S. Basic Materials (IYM): up 18.6% year-to-date

• iShares S&P Global Materials Sector Index Fund (MXI): up 20.5% year-to-date.

For more stories on basic materials, visit our basic materials category.

Kevin Grewal contributed to this article.

The best way to prevent overexposure is to remain educated and know exactly what your portfolio holdings contain.  For example, investing heavily in both emerging markets and the materials sector could be potentially risky in that the two areas could be nearly perfectly correlated, states Gary Gordon of ETF Expert.  The iShares MSCI Brazil Index (EWZ) and the iShares S&P Global Materials Sector Index Fund (MXI) move in tandem, and an investment in both could potentially give you double the exposure to the same sector.

One thing in general to keep in mind is that when you’re gaining exposure to emerging markets, you could very well be gaining exposure to basic materials suppliers.  Even the iShares FTSE/Xinhua China 25 Index Fund (FXI) performance mimics that of MXI.

On the hunt for non-correlating assets? Check out SPDR’s amazing Correlation Tracker.

Diversification, having a strategy and knowing what is under the hood of each of your holdings will prevent your portfolio from doubling or even tripling your exposure to a certain sector, unless that is what your investment goal is.

For more stories on basic materials, vistit our basic materials category.

Kevin Grewal contributed to this article.

It is clear that the emerging market is recovering faster than developed ones, according to ETF Grind. While developed markets are spurred by consumption, emerging markets are driven by investments. ETF Grind provides some funds that an investor may peruse so as to capitalize on the emerging markets over the next few years.

We should note, too, that there are many other ETFs that can provide similar exposure as the world decouples – this is merely a sampling:

• First Trust ISE Glb Engineering and Construction (FLM): up 12.2% year-to-date. The FLM  includes firms that specialize in designing and building infrastructure products. It also includes big-margin engineering and design firms, and focus less on materials and equipment.
• iShares MSCI BRIC Index (BKF): up 53.4% year-to-date. Emerging market funds often include countries that may not decouple as easily, such as South Korea, Mexico and Poland. But BKF provides exposure to the four BRICs emerging markets.
• PowerShares Emerging Markets Infrastructure (PXR): up 55% year-to-date. PXR it invests almost exclusively in firms that build infrastructure, and not in companies that operate and maintain infrastructure. The fund includes emerging market leaders and a few Western companies.
• Claymore/Delta Global Shipping (SEA): up 32.7% year-to-date. SEA invests in companies within the global shipping industry.
• PowerShares DB Commodity Index Tracking (DBC): up 12.7% year-to-date. DBC invests in the six most traded commodities: crude oil, heating oil, aluminum, wheat, gold, and corn.
• iShares S&P Global Materials (MXI): up 30.5% year-to-date. MXI tracks globally active firms that deal in materials. The fund is heavily weighted toward firms situated in developed markets, but they are international conglomerates with operations in emerging markets.
• Emerging Global Shares DJEM Energy Titans (EEO): This brand new fund holds 40 energy firms in emerging markets.  It is weighted toward Russian companies, which make up around one-third of the holdings.
• CurrencyShares Australian Dollar Trust (FXA): up 15% year-to-date. The Australian Dollar is a true “commodity currency” since its value is dependent the country’s natural resource exports.
• Market Vectors Agribusiness ETF (MOO): up 36.2% year-to-date. MOO invests in international agribusinesses.
• WisdomTree Dreyfus Emerging Currency (CEW): up 0.4% in the last week. CEW is new on the scene. It invests in a range of emerging market currencies that could appreciate against the U.S. dollar. It includes currencies such as the Chinese Yuan, Indian Rupee, Brazilian Real and South African Rand.

Emerging markets do have a higher risk profile than those of established foreign and U.S. markets, writes Jim Lowell for MarketWatch. But high inflows into emerging market ETFs warrants another look into this potentially lucrative area. Lowell provides the following areas of interest in the emerging markets:

Brazil. It is a viable and diversified economy that has also has good ties to the global economy.

• iShares MSCI Brazil Index (EWZ): up 64% year-to-date

South Korea and Taiwan can be traded depending on the technology sector.

• iShares MSCI South Korea (EWY): up 33.8% year-to-date
• iShares MSCI Taiwan Index (EWT): up 50.2% year-to-date

India moves along side with the global economy and China is an economic powerhouse in the global stage.

• PowerShares India (PIN): up 57.8% year-to-date
• iShares FTSE/Xinhua China 25 Index (FXI): up 35.9% year-to-date

In Emerging Europe, Russia could be played in relation to the price of oil.

• Market Vectors Russia ETF (RSX): up 97% year-to-date

Israel has strong industries in technology, biotech, and defense.

• iShares MSCI Israel Cap Invest Mkt Index (EIS): up 40.1% year-to-date

South Africa is noted for its metals and mining, or gold industry.

• iShares MSCI South Africa Index (EZA): up 27.6% year-to-date

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

For full disclosure, some of Tom Lydon’s clients own shares of MOO.

Max Chen contributed to this article.

Some of the world’s largest basic materials firms were lured by the great expectations that industrialization in developing economies would sustain, with steel, cement and mining companies to rake in profits. Instead, these industries now lead the recession with much more debt than normal, and concerns for credit default swaps are frightening, reports The Economist.

As a whole, the basic materials cycle is hyper-sensitive to business cycles, and their changes. The sector supplies materials for construction such as cement, steel and metals, and are also prone to changes within the demand for raw materials, such as gold, according to Investopedia.

The six major players in this sector are in debt $136 billion, and acquired much of this during the boom of 2006-2007. The credit default swap prices are rising among the six firms, which area type of insurance against bankruptcy.

• iShares S&P Global Materials (MXI): down 51.8% year-to-date; the six major companies are Rio Tinto; ArcelorMittal 2.3% (which has in MXI); Lafarge, Cemex, Xstrata, and Tata Steel.

A slump in basic materials prices will be met with falling shipping costs. The price of steel has already dropped 20% to 70%, reports The Economist. Market Vectors Steel (SLX) is 71% off its high in May of this year. The key rate for bulk shipping of commodities is down by four-fifths.

The most obvious reaction to the falling activity is shown in the Baltic Dry Index (BDI), which traces prices for shipping bulk cargoes such as iron ore from producers such as Brazil and Australia  to places such as the Americas, Europe and China.

The index has plunged by 85% after hitting a record high of 11,793 points in late May. It is a leading indicator of international trade and, by extension, of economic activity. Weakened global demand coupled with new capacity have strained the index.

The larger firms such as BHP Billiton (BHP) and Rio Tinto (RTP) are far from any turmoil, say they will not be hit hard by falling demand. Rivals of the two giants are already reining in their output based on higher costs.

ETFs that could feel the pain:

• iShares S&P Global Materials Sector Index Fund (MXI), down 49.3% year-to-date
• Claymore/Delta Global Shipping (SEA), down 48% since Sept. 8 inception

Gary Gordon of ETF Expert points out that certain ETFs that are simply not shown any love. The iShares MSCI Australia Index Fund (EWA) is a fund that lacks attention and looks less attractive amid climbing fuel prices, growing mortgage payments and rising interest rates. With Australia looking less attractive by the minute, stimulus may be needed to keep slow growth from turning into no growth.

EWA is down 17.1% year-to-date, with its 35% weighting in financials and another 30% in materials. It’s down 5.3% in the last month.

The iShares Global Materials Fund (MXI) has also fallen to some hard times, despite some of its holdings reporting record earnings. MXI has simply been hit by sector rotation moving from strengths into weaknesses. Nearly every company is a winner, or will merge with a bigger winner. Investors feel that they could see a technical rebound, or at best, they believe fundamentals will drive the shares higher with belief in global economic expansion.

MXI is down 13.1% year-to-date and 12.9% in the last month, even as most companies included have a positive future outlook.

The SPDR Retail (XRT) and the Retail HOLDRs (RTH) have outperformed major U.S. benchmarks this year. Many market analysts feel as though these funds have been able to weather the storm by riding on the success of the discounter giant Wal Mart (WMT). Examining the long term trends of these funds could lead one to ignore what media says about the domestic retail sector. If these funds break above their 200-day moving averages, trusting these long-term trends could be much more promising.

XRT is down 3.8% year-to-date and RTH is up 3.9% for the yearl in the last month, the are respectively up 16.4% and 13%.

While some sectors have become beaten-down in recent months (hello, financials and homebuilders), others have been poster children for success, reports Roger Nusbaum for The Street. Materials and energy have been two areas that have demonstrated strong potential down the line, thanks to domestic and global demand for various commodities such as steel, oil, natural gas and more.

Among the ways to access these areas include:

• Materials Sector SPDR (XLB) is down 2.9% year-to-date, but it’s outperforming the S&P 500 by 11.3%.

• iShares S&P Global Materials Sector Index (MXI) is down 1.8% year-to-date, but could benefit down the line from its global outlook. The United States is 20.3% of the fund

• iShares Dow Jones Basic Materials (IYM) is up 2.7% year-to-date.

Selecting sectors is one of the key strategies in trend following, because as the current situation shows, while there are areas trending down for the time being, other areas are moving up. It’s just a matter of spotting them, but trust us – they’re there!

When choosing a sector, or an ETF to represent it, it is wise for investors to be aware of the current trends in the market that will help move or hinder that sector. This way, investors can move with any changes that are occurring.

These funds are currently below their 200-day moving averages, so you will want to hold off on considering them until they turn around.