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ETF Specialist

Strong Material for a Volatile Sector

This low-cost ETF offers one of the best ways to get exposure to the U.S. materials sector.

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The materials sector represents a very thin sliver of the U.S. stock market--just over 3% of the S&P 500. In contrast, this sector soaks up a meatier 9% of the FTSE All World ex-US Index. That’s partially because many of the leaders in the metals and mining industry are based outside the United States. Investors looking for greater exposure to this sector without delving into foreign stocks might consider  Vanguard Materials ETF (VAW). But this is appropriate only for investors with a high risk-tolerance.

This is one of the cheapest and most comprehensive U.S. materials-sector funds available to individual investors. It offers exposure to nearly every publicly traded materials company based in the U.S. for a razor-thin 0.14% expense ratio. This includes companies operating in the chemicals, metals and mining, paper and forest products, containers and packaging, and construction materials industries. Most of these companies sell into cyclical commodity markets. They also have to contend with volatile raw-material and energy prices and high fixed costs. The fund's broad reach into small- and mid-cap territory makes it more susceptible to these operational risks. During the past five years, this fund was about 50% more volatile than the S&P 500. While its holdings’ sensitivity to the business cycle can introduce significant risk, it may also allow investors to profit handsomely from economic growth.

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Alex Bryan does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.