The materials sector refers to the basic materials used in production. Here we'll check out the 3 best materials ETFs for 2023.
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Introduction – Why Basic Materials ETFs?
As the name suggests, “basic materials” refers to raw materials used in production and construction. Specifically, we're talking about companies involved in the discovery, development, and processing of those raw materials, such as oil and gas refineries. This naturally makes the sector intrinsically tied to changes in the business cycle and the broader economy.
Materials can be things like metals, lumber, oil, ore, glass, chemicals, etc. They're usually natural resources but not always. Retailers who buy these materials from processors and use them in their final products are not included in the sector.
As you can imagine, demand for basic materials is closely tied to the demand for consumer goods, so the sector fluctuates with the health of the economy and levels of consumer spending. As such, a bet on materials is a bet on a recovering or expanding economy. The sector is also closely tied to the housing market, as many raw materials are used in construction.
Below we'll check out a few of the best materials ETFs.
The 3 Best Materials ETFs
The 3 materials ETFs below differ somewhat in scope, cost, popularity, and selection.
XLB – Materials Select Sector SPDR Fund
The Materials Select Sector SPDR Fund (XLB) is by far the most popular ETF in this space with over $6 billion in assets. It launched in 1998. The fund seeks to track the S&P Materials Select Sector Index, a cap weighted index composed of U.S. materials stocks from the S&P 500.
Due to this large cap tilt and market cap weighting, XLB can sometimes be concentrated in a handful of holdings. Top 10 holdings include Sherwin-Williams, Ecolab, DuPont, Dow, and more. This fund has 29 holdings and a fee of 0.10%.
VAW – Vanguard Materials ETF
Next in popularity with about half the AUM of XLB is the Vanguard Materials ETF (VAW).
VAW is also market cap weighted and doesn't really avoid the concentration that XLB has, but VAW provides broader exposure across all cap sizes of U.S. materials stocks compared to XLB and has more holdings at 117, and could thus be considered more diversified than XLB. VAW seeks to track the MSCI US Investable Market Materials 25/50 Index.
Conveniently, VAW is also cheaper with an expense ratio of 0.10%. VAW would be my choice for a materials ETF on this list.
MXI – iShares Global Materials ETF
Those wanting materials exposure outside the U.S. can use the iShares Global Materials ETF (MXI). The fund has about $750 million in assets and seeks to track the S&P Global 1200 Materials Sector Index, a market cap weighted index of materials stocks around the globe. Despite this, the fund still heavily tilts large cap and is fairly concentrated in the U.S. at about 37%. This broader exposure comes at a cost; this fund has a fee of 0.43%.
Where To Buy These Basic Materials ETFs
All these basic materials ETFs should be available at any major broker. My choice is M1 Finance. The broker has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a modern, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
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