In this article, we discuss the 10 best materials ETFs. If you want to skip our discussion on the materials sector, you can go to the 5 Best Materials ETFs.
The global economy heavily relies on basic materials like chemicals, concrete, and metals. Base industrial metals like aluminum, copper, and iron ore are integral for appliances, buildings, equipment, and other infrastructure projects. In addition to these traditional materials, there is a growing emphasis on the importance of metals like lithium in the context of reducing carbon emissions and moving toward renewable energy sources. For instance, the increasing adoption of electric vehicles (EVs) is driving the demand for specific metals. An average electric car uses 53.2 kilograms of copper as opposed to 22.3 kilograms used in a conventional car. Furthermore, an electric car uses 39.9 kilograms of nickel, 8.9 kilograms of lithium, and 13.3 kilograms of cobalt, all of which are not used in a conventional car.
As the transition towards renewable energy is gaining pace with every passing day, leading management consultancy firm McKinsey & Company believes that materials companies will be required to increase the pace of mining from historical levels for several materials. This could only be ensured by increasing investments in mining, refining, and smelting to roughly $3 trillion to $4 trillion by the end of this decade. This would reflect a 50% increase from the previous decade. Furthermore, there will be an additional demand of 300,000 to 600,000 mining professionals to support these expanded operations. China is also working aggressively to increase the total output of its material sectors. The country is aiming to achieve a total output of $1.38 trillion (10 trillion yuan) by 2025 from $962.3 billion (7 trillion yuan) in 2021.
Investment Options in the Materials Sector
While basic materials have various industrial uses, they also serve as significant investments due to their qualities as a hedge against inflation and a store of value. Inflation in the US is again on the upward trend as the US consumer prices grew by 3.7% YoY in August 2023. This marks the second consecutive month of growth in the consumer price index (CPI) following 12 consecutive months of decline. It must be noted that annual inflation in the US averaged 2.1% between 2000 and 2020. Under these circumstances, investors are looking at basic materials and commodities as a strong hedge against increasing price levels. Throughout history, basic materials, including agricultural goods, commodities, and metals, have shown an upward price trend during periods of high inflation.
Investors can consider investing in the best basic materials stocks such as Freeport-McMoRan Inc. (NYSE:FCX), Newmont Corporation (NYSE:NEM), and Dow Inc. (NYSE:DOW) or the best materials ETFs to gain exposure to the sector. According to our research, the Materials Select Sector SPDR Fund (NYSEARCA:XLB) is the oldest ETF in the materials sector. It was launched in December 1998 and is one of 11 Select Sector SPDR ETFs that divide up the S&P 500 by sector. XLB ETF tracks the Materials Select Sector Index. In addition, there are three other ETFs worth mentioning for their notable presence in the materials sector despite not making it onto our list based on their five-year price performance.
The first ETF is the Fidelity MSCI Materials Index ETF (NYSEARCA:FMAT), which was launched in October 2013. Over the last five years, the ETF has generated a return of 32.8%. It has a negligible expense ratio of 0.08% only. The second ETF is the Vanguard Materials Index Fund (NYSEARCA:VAW). The materials ETF by Vanguard tracks the MSCI US Investable Market Materials 25/50 Index. The ETF has an expense ratio of 0.10%, which is typical for Vanguard Index funds. Over the past five years, the fund has generated a return of 32.7%. The third ETF that requires special mention is the iShares Global Materials ETF (NYSEARCA:MXI), which tracks the S&P Global 1200 Materials Index. The ETF has experienced an increase of 21.6% in the last five years.
We have shortlisted the 10 best materials ETFs for 2023 based on their 5-year performance. Some of the ETFs included in the list provide broad exposure across the sector, while some are focused on a sub-industry within the materials sector. It's important to note that the number of holdings mentioned for these ETFs does not include cash as a holding. The top five ETFs on our list have even outperformed the S&P 500 Index based on their five-year performance. The ETFs have been ranked in ascending order of their performance as of September 15.
Best Materials ETFs
10. U.S. Global GO GOLD and Precious Metal Miners ETF (NYSEARCA:GOAU)
5-Year Price Performance: 47.2%
Total Net Assets as of September 15, 2023: $93.82 million
Expense Ratio: 0.60%
Number of Holdings: 28
U.S. Global GO GOLD and Precious Metal Miners ETF (NYSEARCA:GOAU) was launched in June 2017 and invests primarily in companies involved in producing metals through active or passive means. The top 10 holdings of the ETF represent 59.1% of total assets and comprise notable companies like Franco-Nevada Corporation (NYSE:FNC), Wheaton Precious Metals Corp. (NYSE:WPM), and Royal Gold, Inc. (NASDAQ:RGLD) with 11%, 10.7%, and 10.4% weight, respectively.
Here's what White Falcon Capital Management said about Wheaton Precious Metals Corp. (NYSE:WPM) in its Q2 2023 investor letter:
“Precious Metals Royalty basket (Wheaton Precious Metals Corp. (NYSE:WPM), SSL, TFPM): In the current macroeconomic environment, there are many ways to ‘win’ with gold. It is remarkable that even with record positive real yields, gold is flirting with all time highs. Why? Western central banks are increasing interest rates which means that they will have to pay more interest on the record levels of debt that their government’s owe. Where will the money come from to pay the higher interest expense? The answer is simple – more debt and more money printing! We believe the gold knows this! We believe that precious metals will protect real purchasing power and act as a hedge to the portfolio when macroeconomic uncertainty arises. Owning royalty companies at reasonable valuations gives us a high quality exposure to precious metals without project or cost inflation risks inherent in a mining company.”
9. The Hoya Capital Housing ETF (NYSEARCA:HOMZ)
5-Year Price Performance: 49.4%
Total Net Assets as of September 15, 2023: $36.74 million
Expense Ratio: 0.30%
Number of Holdings: 100
The Hoya Capital Housing ETF (NYSEARCA:HOMZ) was launched by Hoya Capital Real Estate in March 2019. The ETF seeks to track the performance of the Hoya Capital Housing 100 Index, which comprises 100 companies that collectively represent the performance of the US housing industry. The fund offers exposure to broad housing equities, including homebuilding, housing services, home furnishings, home financing, and real estate services. The Hoya Capital Housing ETF (NYSEARCA:HOMZ) pays out a monthly dividend of 6.8 cents per share, translating into a dividend yield of just over 2%.
8. VanEck Steel ETF (NYSEARCA:SLX)
5-Year Price Performance: 50.2%
Total Net Assets as of September 15, 2023: $124.72 million
Expense Ratio: 0.56%
Number of Holdings: 26
VanEck Steel ETF (NYSEARCA:SLX), launched in October 2006, invests in companies involved in the steel industry, which is part of the basic materials sector. The fund's investment objective is to replicate the NYSE Arca Steel Index, which tracks global companies involved in the steel industry. Geographically, the fund has a significant allocation to the US, accounting for 55.8% of the portfolio. This is followed by Brazil and Australia with 17.7% and 10.1% weightage, respectively. The ETF has an annual dividend yield of 4.27%.
7. First Trust Materials AlphaDEX Fund (NYSEARCA:FXZ)
5-Year Price Performance: 51.1%
Total Net Assets as of September 15, 2023: $548.14 million
Expense Ratio: 0.61%
Number of Holdings: 38
First Trust Materials AlphaDEX Fund’s (NYSEARCA:FXZ) investment objective is to replicate the investment results of the StrataQuant Materials Index. The ETF has an average daily trading volume of 97,261 shares. First Trust Materials AlphaDEX Fund (NYSEARCA:FXZ) pays out quarterly dividends and offers a dividend yield of 2%. The top 10 holdings of the ETF have a combined weightage of 46.4% of the total assets.
6. SPDR S&P Metals and Mining ETF (NYSEARCA:XME)
5-Year Price Performance: 53.8%
Total Net Assets as of September 15, 2023: $1.78 billion
Expense Ratio: 0.35%
Number of Holdings: 32
SPDR S&P Metals and Mining ETF (NYSEARCA:XME) seeks to track the S&P Metals and Mining Select Industry Index, which represents the metals and mining segment of the S&P TMI. State Street Global Advisors Funds Management Inc. is the administrator of the ETF. Furthermore, SPDR S&P Metals and Mining ETF (NYSEARCA:XME) has a quarterly dividend distribution frequency and boasts a yield of 1.70%.
United States Steel Corporation (NYSE:X), Alpha Metallurgical Resources, Inc. (NYSE:AMR), Commercial Metals Company (NYSE:CMC), and CONSOL Energy Inc. (NYSE:CEIX) are the top four constituents of the fund and have a combined weightage of 22.5%.
Here’s what Black Bear Value Partners said about CONSOL Energy Inc. (NYSE:CEIX) in its Q2 2023 investor letter:
“We have a large investment across the energy & commodity spaces. The thesis is simple…we haven’t developed enough energy or commodity resources to satisfy the near- and medium term needs of the world as well as provide for a renewable/less-carbon intensive future.
CONSOL Energy Inc. (NYSE:CEIX) is an American energy company focused on the coal sector. The business has undergone a shift from being a majority producer of coal for domestic energy purposes to an export-driven producer of coal for non-power generation purposes. Over the last few years, the Company has delevered to a near-zero net debt position and is trading at a 25-30% unlevered free cash flow. While there is a negative stigma associated with coal (and some deserved) there are parts of the world that have limited energy alternatives and will require coal supply over the coming years. I expect the company to commit a large amount of the free cashflow to buying in cheap stock and the per share intrinsic value to grow substantially over the next 3 years.”
In addition to investing in the best materials ETFs, investors can also consider investing in stocks such as Freeport-McMoRan Inc. (NYSE:FCX), Newmont Corporation (NYSE:NEM), and Dow Inc. (NYSE:DOW) to gain exposure to the materials sector.
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Disclosure: None. 10 Best Materials ETFs is originally published on Insider Monkey.