A Comprehensive Guide to Materials Sector ETFs in the US Market

The materials sector often gets overlooked by US investors, despite its potential in market cycles. With a weight of just 2.61% in the S&P 500, this smallest sector allocation tends to fly under the radar compared to technology or healthcare. Yet for those seeking cyclical portfolio exposure, materials ETFs present compelling opportunities worth exploring.

Understanding the Materials ETF Landscape

The materials space includes companies involved in chemicals production, metals mining, plastics manufacturing, and building products. The sector’s largest representative, the Materials Select Sector SPDR (XLB), demonstrates impressive historical performance—ranking among the top-performing sector SPDRs for six months of the year, more frequently than other sector funds.

However, cap-weighted funds like XLB carry significant concentration risk. For example, traditional materials ETFs often dedicate substantial portions to just a handful of mega-cap holdings, which can limit diversification benefits.

Large-Cap US Materials ETF Options

Fidelity MSCI Materials ETF (FMAT) offers an attractive entry point with a rock-bottom expense ratio of 0.084% annually—making it one of the most cost-efficient sector funds available. Like XLB, FMAT is a market-cap weighted fund but features the same concentration concerns. Currently, the fund dedicates over 25% of its assets to companies like DowDuPont and Linde, which means investors should be comfortable with this heavy weighting before committing capital.

For those wanting exposure beyond traditional large-cap holdings, the Invesco S&P SmallCap Materials ETF (PSCM) takes a different approach. With an expense ratio of 0.29%, PSCM provides US small-cap materials exposure through the S&P SmallCap 600 Index. The fund’s 34 holdings carry an average market cap of $1.57 billion, with roughly two-thirds concentrated in chemicals manufacturers. This smaller universe offers a more balanced distribution between growth and value opportunities.

Specialized US Materials Exposure

Investors with higher risk tolerance might consider VanEck Vectors Rare Earth/Strategic Metals ETF (REMX). This is the sole US fund dedicated exclusively to rare earth miners, offering exposure to themes like electric vehicle demand and strategic mineral needs. However, REMX comes with pronounced volatility—over the past 12 months it declined 37.40% compared to XLB’s 0.60% drop. Less than 18% of REMX’s holdings are large-cap stocks, amplifying price swings.

Global X Silver Miners ETF (SIL) represents the largest silver mining fund available. With a 0.65% expense ratio and annualized volatility of 36.43%, SIL tracks the Solactive Global Silver Miners Index. While more volatile than broad sector plays, SIL can capture outsized gains when silver rallies. Historical supply dynamics show that global silver demand exceeded supply by 810 tons in 2017 when excluding investment demand, supporting longer-term thesis arguments.

Momentum and Commodity-Specific Strategies

The Invesco DWA Basic Materials Momentum ETF (PYZ) employs a technical screening approach, identifying companies showing relative strength through the Dorsey Wright Basic Materials Technical Leaders Index. Since its 2006 inception, PYZ has outperformed the S&P 500 Materials Index by approximately 200 basis points, though this comes with a higher 0.60% expense ratio and greater volatility than traditional alternatives.

The VanEck Vectors Steel ETF (SLX) is the only dedicated US steel ETF, benefiting from tariff dynamics that supported domestic steelmakers. Trading up more than 13% year-to-date, SLX remains sensitive to supply-demand cycles. Industry analysts project US steel capacity could expand 20% by 2022 as new electric arc furnaces come online, potentially creating oversupply pressures.

Balanced Metals and Mining Exposure

For investors seeking broader diversification without entering niche territory, the SPDR S&P Metals & Mining ETF (XME) offers a middle-ground solution. Managing $462.19 million in assets with a lean 0.35% expense ratio, XME holds 29 stocks across aluminum, coal, copper, diversified metals, gold, precious metals, silver, and steel. Nearly half the portfolio tilts toward steel companies, making XME a poor pairing with the specialized SLX fund. Coal and aluminum positions combine for 22.10% of fund weight, with XME up 12.10% year-to-date but requiring an additional 24% rally to reclaim its 52-week high.

Key Considerations for US Materials Investors

Different materials ETFs serve different strategic purposes. Cap-weighted funds like FMAT and XLB offer traditional sector access but with elevated single-stock risk. Small-cap alternatives like PSCM provide diversity but with less liquidity. Specialized plays like REMX and SIL introduce commodity-specific leverage but with elevated volatility. Momentum-based PYZ and SLX bring tactical timing elements but require more active management thinking. Meanwhile, XME balances accessibility with reasonable diversification across the materials landscape.

The choice ultimately depends on your risk tolerance, time horizon, and specific portfolio objectives within the US markets.