Living In a Materials ETF World: Broad & Targeted Exposure

Materials are often viewed as a sleepy, cyclical corner of the market, but the artificial intelligence (AI) buildout is adding vim and vigor to the sector. Along with a confluence of other factors like persistent inflation concerns, global supply chain recalibrations, as well as a buildout of physical infrastructure, materials ETFs offer investors ample opportunities in the second half of 2026.

The physical infrastructure required for AI data centers and power grid expansion is driving significant capital inflows into basic materials like copper, concrete, and structural steel. Broad materials ETFs offer liquid, inflation-hedged core market exposure, while sector-specific funds target critical technology inputs. Combining core broad-market funds with targeted critical mineral ETFs creates a strategic portfolio barbell that captures both industrial demand and supply chain innovation.

Materials ETFs have captured the fourth-best sector inflows year-to-date, signaling that investor demand supports allocation to real assets. As noted, various overlapping macroeconomic forces are propelling basic materials beyond traditional cyclical boundaries. AI continues to dominate financial news headlines, but it needs the requisite hardware in order to run. As such, it requires physical infrastructure, immense data centers, and vast power grids. Building out these facilities demands copious amounts of concrete and structural steel, while upgrading power grids to fuel energy-hungry AI chips necessitating unprecedented volumes of copper.

Simultaneously, supply constraints, geopolitical friction in the Middle East, and rising extraction costs have elevated input prices across basic resources. Companies supplying primary inputs have inherent pricing power, allowing them to pass cost increases down the supply chain. Historically, physical assets and the companies that extract or process them have been effective hedges against broader price inflation. When consumer prices ultimately rise and fiat purchasing power dilutes, the revenues of basic material producers also have the potential to appreciate.

Investors looking for diversified, liquid access to the materials space can utilize several key ETFs with varying degrees of exposure. These include broad funds that cast a wide net into the materials equities universe as well as targeted niche plays. For core domestic exposure, the State Street Materials Select Sector SPDR ETF (XLB) serves as the flagship fund in the sector with over $8 billion in assets. XLB, with its low 0.08% expense ratio, concentrates primarily on S&P 500 material giants to include chemical producers, industrial gas providers, and mining corporations. Investors looking for another low-cost core alternative can utilize the Vanguard Materials ETF (VAW), which provides comprehensive U.S. basic materials exposure across large-, mid-, and small-cap segments with a 0.09% expense ratio. For broader geographic reach and with an expense ratio of 38 basis points, the iShares U.S. Basic Materials ETF (IYM) targets domestic companies involv...