Understanding the Materials Sector: 7 Steel and Metals ETFs for Portfolio Diversification

The materials sector represents just 2.61% of the S&P 500’s total allocation, making it the smallest sector by weight. Yet this underdog status shouldn’t deter investors from exploring opportunities within this space. Materials ETFs offer exposure to everything from steel production to rare earth mining, with varying risk profiles and strategic focuses.

The Foundation: Traditional Materials ETF Options

The Materials Select Sector SPDR (XLB) stands as the largest fund in this category, consistently ranking among the best-performing sector SPDR funds throughout the year. This fund typically concentrates heavily in chemicals manufacturers while maintaining exposure to metals mining, plastics production, and building materials makers.

For those seeking lower costs, the Fidelity MSCI Materials ETF (FMAT) offers an expense ratio of just 0.084% annually—making it one of the most economical choices available. However, both FMAT and XLB share a notable drawback: significant concentration risk. Currently, these cap-weighted funds allocate over 25% of their holdings to major industrial players like DowDuPont and Linde.

Exploring Niche Markets Within Materials

Investors willing to venture beyond conventional materials exposure have several specialized alternatives worth considering.

The Invesco S&P SmallCap Materials ETF (PSCM) serves as the small-cap counterpart to XLB, with an expense ratio of 0.29%. This fund tracks 34 holdings with an average market capitalization of $1.57 billion, offering roughly equal exposure to growth and value opportunities. Nearly two-thirds of PSCM’s components are chemicals manufacturers.

For those targeting the steel sector specifically, the VanEck Vectors Steel ETF (SLX) provides dedicated exposure with a 0.56% expense ratio. Benefiting from tariff policies supporting domestic producers, SLX has surged more than 13% this year. However, investors should note that this steel ETF remains highly sensitive to commodity supply-demand dynamics.

Specialized and Higher-Volatility Plays

The VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) targets rare earth miners with an expense ratio of 0.61%. This fund appeals exclusively to risk-tolerant investors, given its historical volatility significantly exceeds traditional materials ETFs. Over the past year, REMX declined 37.40% compared to XLB’s 0.60% decline, reflecting the sector’s inherent unpredictability. Less than 18% of REMX’s holdings consist of large-cap companies, amplifying volatility further.

The Global X Silver Miners ETF (SIL) tracks the world’s largest silver mining companies with a 0.65% expense ratio. Miners ETFs generally exhibit substantially higher volatility than standard sector funds, with SIL’s underlying index showing annualized volatility of 36.43%. However, this elevated risk can translate to outsized gains when precious metals rally. Research indicates that over five years, global silver demand has exceeded supply, with 2017 showing an 810-ton shortage (excluding investment bar and coin purchases).

Alternative Strategy: Momentum-Based Approach

The Invesco DWA Basic Materials Momentum ETF (PYZ) employs a unique strategy, tracking the Dorsey Wright Basic Materials Technical Leaders Index with a 0.60% expense ratio. This momentum-based methodology identifies companies showing relative strength within the materials universe. Since its 2006 inception, PYZ has outperformed the S&P 500 Materials Index by nearly 200 basis points, despite being pricier and more volatile than traditional alternatives.

Broadening Exposure: Diversified Metals and Mining

The SPDR S&P Metals & Mining ETF (XME) offers an ideal middle ground for investors seeking exposure beyond standard materials funds while avoiding overly specialized plays. With a competitive 0.35% expense ratio and $462.19 million in assets, XME holds 29 stocks spanning aluminum, coal, copper, diversified metals, gold, precious metals, silver, and steel sectors. Nearly half its allocation targets steel companies, making it complementary rather than redundant with dedicated steel ETFs. Currently up 12.10% this year, XME must rally another 24% to reach its 52-week high.

Conclusion

Whether seeking broad materials exposure or tactical exposure through a steel ETF or precious metals focus, the universe of materials-focused funds has expanded substantially. Each option serves different investor needs—from the cost-conscious using FMAT to the sophisticated momentum trader using PYZ. Understanding these distinctions enables more informed portfolio construction within this historically overlooked sector.