The Foundations of Investing in Basic Materials ETFs

The Foundations of Investing in Basic Materials ETFs

We mine the topic, turning up concrete advice for portfolio building.

Reviewed by: Staff
Edited by: Ron Day

Gravel, lumber, steel: basic materials are essential to commerce and much else in our lives. 

You'd never know this by looking at the S&P 500 index. Basic materials is the smallest of the 11 S&P 500 sector groups and makes up less than 2% of the weight of that index. 

The largest holding in the Materials Sector SPDR ETF (XLB) is the only one from that sector among the 120 largest S&P 500 components. Yet many investors have likely at least researched, if not owned, companies involved in the chemical and construction businesses, as well as those that mine for gold, silver, copper and steel. 

At a time when the S&P 500 has been monopolized by a small number of companies in a handful of sectors, it makes sense to better understand what ETFs offer in terms of accessing basic materials stocks.

The ETF screening tool produces 44 ETFs that relate to this smallest sector of the US stock market. XLB is the second largest of those at $5.3 billion in assets, spread across that broad set of industries mentioned above. It is a market capitalization weighted ETF. The ETF holds 30 stocks, all the materials names within the S&P 500. However, just 10 of those account for nearly half of XLB, with one merged chemical company (Linde PLC) representing 20% of the total fund.

This Gold Mining ETF is the Category’s Biggest

The largest ETF in the basic materials space is the Van Eck Gold Miners ETF (GDX), which owns 57 stocks with an average market capitalization of $11 billion. Its sister ETF, the Van Eck Junior Gold Miners ETF (GDXJ) owns smaller miners of the yellow metal which have an average market cap of about $5 billion.

While gold and silver mining ETFs dominate the offerings in the sector, there are some intriguing funds that cover other silos within basic materials. Van Eck’s presence in this part of the market includes the Van Eck Steel ETF (SLX), a $93 million offering that has been around for 18 years. SLX has posted annual returns of between 11% and 31% in six of the past seven calendar years.    

Among this sector’s more intriguing small fry funds are the Global X Disruptive Materials ETF (DMAT), a $5 million offering that is widely diversified globally. DMAT classifies 10 different types of “disruptive” materials including rare earth, lithium, copper and carbon fiber.  

Small Cap ETFs May Offer Value

And, at a time when small cap stocks have been outdistanced by large stocks for some time, the Invesco S&P SmallCap Materials ETF (PSCM) owns 34 smaller stocks that collectively trade at just over one times sales and 16x trailing earnings.  

Some investors may consider this vital but small sector “immaterial” in building diversified investment portfolios. But this sector offers some unique and differentiated return patterns, particularly at a point in the market cycle when inflation is still front of mind for many investors, not to mention the Fed. 

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.