Investors who realize the great potential of the materials sector constantly seek simple, effective ways to leverage these potentials to benefit their portfolios. Materials ETFs are one of these ways. These funds invest in companies involved in the basic materials sector, allowing investors to access and invest in stocks of these companies.
This article introduces you to the basic materials sector, why you should (not) invest in the sector, and why material ETFs are one of the best ways of investing in the sector.
You can check out the key takeaways from this article below;
- There are tons of basic materials ETFs in the current market, but we have shortlisted FMAT, MXI, VAW, FXZ, and XLB as top options for you to choose from.
- Material investments offer excellent opportunities to investors looking to diversify their portfolios and hedge risks by exploring the materials sector.
- Material ETFs are one of the best ways investors can effectively invest in the materials sector.
- These mutual funds invest in stocks of companies that are into extracting, processing, and developing raw materials.
- Your preferred material ETFs from the list should reflect your investment strategy and risk appetite.
Material ETFs Explained
Materials Exchange Traded Funds (ETFs) are funds that invest in the stocks of companies in the materials sector. The materials sector is attractive–it is where you find companies that extract, process, and develop raw materials. These include miners, agricultural products producers, homebuilders, industrial gases, timber companies, and others.
Since the sector, and the companies it comprises, provide the all-important raw basic materials major industries need to survive, it is understandable why it attracts strong interest from investors. Investors looking to pursue this interest can do so through different investment vehicles, including exchange-traded funds.
Materials exchange-traded funds are an excellent way of holding materials stocks. Investors can effectively avoid the single-stock shock by investing in large numbers of stocks dealing in the materials industry. With a global or domestic materials ETF, you can invest in the best companies involved in the materials sector in the United States and worldwide.
Similar to other ETFs, basic materials ETFs are easily accessible, easy to manage, and cheap.
Investing in the Materials Sector
The basic materials sector has a lot of potential, but it is not perfect. Let’s look at the pros and cons.
Pros of Investing in the Materials Sector
As mentioned earlier, this sector is the primary source of raw materials other industries use in producing goods and services. As a result, the sector tends to do well in a thriving economy and rewards investors who put their faith in companies involved in this sector.
In addition to the constant demand for raw materials, the cyclical nature of some basic materials stocks can benefit investors. It means every time economic conditions are favorable, the stocks will do well, and investors can generate profits. The reverse is the case when the economic conditions are poor.
Investors can easily use the economic conditions to guide their investment decisions, making a case for how simple it is to invest in the materials sector. In addition, these stocks can also serve as safe havens, especially when the market or economy is struggling—for instance, precious metals like gold and silver record gain when the economy declines.
Cons of Investing in the Materials Sector
Investing involves risk, but the cyclical nature of materials stocks can be detrimental to investors’ portfolios, especially investors who prefer slow, steady, and consistent portfolio growth while enjoying as much dividends as possible.
The basic materials sector is also capital-intensive. For instance, companies invest so much in mining and related activities and may struggle to make decent profits, except they have massive operations. So, there may be profitability concerns.
5 Investable Market Materials ETFs To Choose From
Below is a well-curated list of the best market material ETFs you can choose from to save you long hours of research.
1. Fidelity MSCI Materials ETF (FMAT)
The Fidelity MSCI Materials ETF (FMAT) is a materials ETF that is designed to provide investments with returns that correspond to the performance of the MSCI USA IMI Materials Index. It invests at least 80% of its worth into this index, representing the general performance of the U.S. equity market materials sector.
FMAT was launched in October 2013 as a materials ETF investing in a blend of stocks in the materials sector. Regarding exposure, 84.48% of the portfolio goes into the North American materials stocks market, while the other 15.51% is spread across Europe. In addition, the top 10 of the 128 stocks in its portfolio account for 47.78%, while the other 118 represent 52.22%.
The fund has performed well over the years. It has returned 7.39% since inception, 7.65% in the last five years, and 9.87% in the previous three.
The iShares Global Materials ETF (MXI) is a good option if you prefer a global basic materials ETF. It offers exposure to companies in raw materials production, including forestry products, metals, and chemicals. However, it is essential to mention that the fund is slightly overweight. Despite being an international ETF covering over 15 countries, 40% of the portfolio allocation goes to the U.S. In addition, MXI has 50% of its funds invested in chemicals and another 35% in metals and mining, which means it may not be the best if you prefer broader diversification.
MXI is a decent performer – 4.97& total return since inception in 2006, 5.59% in the last ten years, and 7.49% over the previous five years. The expense ratio is 0.43%. It is one of the cheapest materials ETFs on the list, with an expense ratio of 0.08%.
3. Vanguard Materials ETF (VAW)
Next is the Vanguard Materials ETF (VAW), a materials ETF tracking the MSCI US Investable Market Materials 25/50 Index. This index measures the investment return of domestic stocks in the basic materials sector.
VAW was launched in January 2004 and employed a full-replication strategy and/or sampling strategy to choose the stocks in its portfolio.
Most stocks in VAW’s portfolio extract or process raw basic materials, including chemical companies that produce diversified, agricultural, and specialty chemicals. It also offers decent exposure to stocks of companies that are into gold, industrial gases, and metals.
VAW has returned 9.01% since its inception. The fund’s 10.46% return in the last decade is impressive. It has also returned 12.45% during the previous three years. The fund’s total net assets are worth about $4 billion, and the expense ratio is 0.10%.
It currently has 116 stocks in its portfolio.
4. First Trust Materials AlphaDEX ETF (FXZ)
The First Trust Materials AlphaDEX ETF (FXZ) is the fourth ETF on the list. The investment objective of this fund is to replicate the performance of the StrataQuant® Materials Index. FXZ is the only ETF tracking this index, with over $1.5 billion in total assets under management.
The fund has 39 holdings in its portfolio, excluding cash. These include stocks of companies in chemicals (51.83%), industrial metals and mining (37.27%), precious metals and mining (5.77%), and industrial materials (5.13%). Interestingly, these stocks are healthily weighted, with the largest two securities holding just 5.6% and 5.4% of the portfolio, respectively.
Regarding past performance, FXZ has returned 8.61% since inception and 11.10% in the last ten years. The 15.48% in the previous three years is the best compared to the returns of other funds on this list within the same time frame.
The net expense ratio of FXZ is 0.64%.
5. Materials Select Sector SPDR Fund (XLB)
The Materials Select Sector SPDR Fund (XLB) is issued and managed by State Street Global Advisors (SSGA). Launched in December 1998, it is the oldest material sector ETF on the list. This fund seeks to track the performance of the Materials Select Sector Index, which effectively represents the materials sector of the S&P 500 Index.
With XLB, investors can expose their portfolio to stocks of 28 companies in the Materials Select Sector Index, spread across chemicals (69.47%), metals and mining (13.18%), containers and packaging (12.38%), and construction materials (4.97%) sub-sectors. The fund has recorded a 7.35% average annual return since inception. The three- and five-year returns are 9.51% and 8.06%, respectively.
The net expense ratio of XLB is 0.10%, making it one of the cheapest on this list.
The materials sector is essential–it is crucial to the smooth running of several other industries by serving as the major source of raw materials. It comprises companies that manufacture or produce chemicals, agricultural products, construction materials, wood, glass, paper, packaging, and steel.
Like other mutual funds, basic materials ETF are readily available from top issuers in the industry. So you can rest assured of finding one that corresponds to your investment strategy and risk appetite. Our list of investable market materials ETFs is a good start if you are unsure which options to consider.
How to Choose the Best Materials ETF for Your Portfolio?
The rule is simple–always consider your investing goals before choosing any materials ETF. Consider the underlying index, the holdings, past performance, and the distribution of stocks in your potential materials ETFs before adding them to your portfolio. You should only choose materials ETFs that give you what you want and take you closer to your investment goal.