As materials and industrials climb together, so does investor opportunity

For the last several months, the market has seemed fixated on any stock with some kind of claim to artificial intelligence development.

Yet, probably unbeknownst to many individual investors, some non-tech stock sectors have been posting strong gains.

Chief among them is materials, the sister sector of industrials.

The second smallest sector in the market (after real estate), materials provide the myriad of stuff industrials need to manufacture goods, process products, erect buildings, pave roads, build bridges and package goods. Products include lumber, concrete, steel, industrial chemicals, metals, glass and paper/cardboard.

Materials’ journey this year

After languishing last fall, materials went up like a rocket in December 2025 and continued to soar in January and February. The sector declined with the overall market in March from the impacts of the Iran war, recovered nicely in April, and proceeded to trade more or less sideways until perking up again in June, with a gain of 3% the second week of the month.

Year-to-date as of June 24^th, the materials sector had outperformed the S&P 500 by more than 5%.

An easy way to participate is State Street Materials Select Sector SPDR ETF (XLB), a broad fund covering the gamut of materials company types, which has outpaced the ETF for S&P 500 index of large-company stock for 2026, with gains of 13.7%, compared with 8.1% for the same fund company’s ETF for the S&P 500.

Materials have delivered this growth despite less-than-enthusiastic ratings from some analysts, including Morningstar’s opinion that the sector was 20% overvalued. But the rating company has since lowered this number to 3%.

In addition to strong recent growth, materials pay dividends higher than those of the S&P 500 average, with some ETFs’ annual payouts approaching 2%. Thus, materials offer the gravy of income along with the meat of growth.

Roaring with industrials

Growth in materials is part of the long-held “Roaring 2020s” vision of renowned market economist Ed Yardeni, who this year has had the satisfaction of seeing this sanguine projection realized, however belatedly. The Roaring 1920s acquired the moniker from sustained growth in the market overall and industrials in particular.

When industrials companies see trouble ahead, they of course cut back on materials orders and draw on inventories, so this sector is a reliable canary in a coal mine for industrials performance. If investors are having to sell materials to contain portfolio damage, in most cases they should probably sell industrials as well.

A key advantage of many materials companies is a wide moat, a metaphor for a high level of difficulty that newcomers face in attacking the fortresses of established businesses. For example, it would be extremely difficult today to start a new steel company because of regulatory and other hurdles.

Citing tariffs and other constraints, analysts including the influential CFRA conservatively recommend under-weighting materials in portfolios. Yet others, Yardeni among them, recommend overweighting to take advantage of increasing consumption implied by positive projections for industrials.

Shining metals

Metals are where the two sides agree. CFRA has rated copper miner First Quantum Minerals (FQVLF) a strong buy, and recently raised its 2026 copper price forecast, citing accelerating demand from AI data centers, electrical grid modernization and global electric vehicle adoption. And as this demand depletes the current above-ground supply of copper, some analysts are projecting a shortage in the near term.

Copper is known in financial circles as Dr. Copper for its role as a bellwether for industrials and economic growth in general.

Also quite strong are rare-earth elements, some of which older physicians probably didn’t learn much about in their undergraduate chemistry courses. These 17 elements have unique properties that make them highly relevant today, as they’re essential for use in defense infrastructure, including advanced precision-guided missiles and stealth aerospace technology.

Here, too, CFRA makes an exception to its overall outlook for materials, with a strong buy rating on MP Materials Corp. (MP) of Nevada, touted as the only fully integrated rare-earth elements producer on American soil.

Though deposits of rare earths exist in Greenland and Canada and may be present in unidentified regions of the American west, most are mined from relatively rich deposits in China. This strategic defense advantage for China elevates demand by underscoring the need for exploration in the U.S. and allied nations to reduce dependence on tenuous Chinese imports.

Chemicals and gases

The materials sector is heavily weighted toward chemical companies; they account for about half the holdings of U.S. large-cap materials ETFs. Understanding their products can be a nerdy undertaking to say the least. For those inclined to get into the nitty-gritty, GlobeEX Ventures offers an online guide to industrial chemicals processing.

Another key materials area is industrial gases, which are essential for manufacturing various items including semiconductors, the linchpins of AI technology. A major producer of industrial gases is Linde PLC, a U.K.-domiciled company that for years been a leading holding of American materials ETFs including State Street’s XLB.

Most individuals getting into materials funds should probably avoid those that use high amounts of leverage or derivatives to juice gains. Buying such funds can come back to haunt investors when the market goes south because their dynamics can greatly amplify losses.

Here are three materials ETFs that don’t have these risky features:

• State Street Materials Select Sector SPDR (XLB). Up nearly 20% over the past 12 months, this is a capitalization-weighted fund. As a result, about one-third of the top 10 holdings are metals miners. Yet beyond metals, this fund tracks the full range of materials companies, whose gains have been more modest.
• VanEck Rare Earth and Strategic Metals (REMX). This fund has basically traded sideways in recent months, But a stellar end to 2025 and rapid gains early this year have made for a 12-month gain of nearly 138%. This ETF was up about 30% YTD as of June 22. While holdings include some Latin American names, REMX unavoidably includes companies in China because of that country’s globally rich metals deposits. Companies tracked mine uranium, tungsten, titanium and lithium, a cornerstone of EV battery technology.
• Global X Copper Miners (COPX). This global mining fund is a good portfolio choice for those seeking to focus more copper and avoid a lot of exposure to gold, a major constituent of many other metals funds because of its astronomical gains in recent years (which elevates risk). Though it’s only up about 20% this year, COPX has gained 99% over the last 12 months.

Investors considering purchases of individual stocks may want to browse the large-cap constituents of XLB for examples. Yet some smaller companies were among those that excelled in our tests for downside risk, and have good projected performance as well:

• Ecovyst Inc. (ECVT). A supplier of sulfuric-acid products and services, this small-cap stock is up about 30% this year. Analysts’ projections for annual growth average a whopping 38% a year for the next five.
• Reliance Inc. (RS). Products of this mid-cap metals processor include aluminum, brass, copper, carbon steel, stainless steel and titanium. Projected growth over the next five years: 17% annually. The stock has risen 39% this year.
• Eastman Chemical Co. (EMN). This midcap company was established by George Eastman, founder of the fallen film giant Eastman Kodak Co., and was under that company’s corporate umbrella until it split off in 1994. Projected annual growth: 12.4%. EMN leads our low-risk group of stocks in annual dividends, with an annual dividend yield of about 4.8%, better than many investment-grade bonds.

On the surface, materials stocks may seem boring. After all, mentioning them at cocktail parties doesn’t tend to draw attention. But true market awareness requires a basic understanding of this sector, as industrials couldn’t exist without their products.

Dave Sheaff Gilreath, CFP,® is a Partner Advisor at Allworth Financial LP, an investment advisory firm registered with the SEC. Investments mentioned in this article may be held by Allworth Financial, affiliates or related persons.