Technology stocks have entered a phase of heightened volatility that could drag down broader stock indexes. Investing in materials is one way to buffer the risk.

The tech-heavy Nasdaq Composite Index gained 1.4% this week after dropping 4.6% the week prior. The Cboe Volatility Index had a banner month of June, rising 20%.

Chip names, where investors have taken profits by selling after brief rallies, are a primary cause of the volatility. That industry still has a lot going for it, as seen by Micron Technology's recent stratospheric earnings. That said, the market hasn't gotten over lingering concerns that the growth of artificial-intelligence-fueled data center and chip investments will eventually slow dramatically.

Investors can be forgiven for not wanting to buy more tech at these levels. It's one thing if you own a stock that has already soared, and you are willing to hang on for the potential of more gains. It's another thing if you are wading into the market with new money and don't want to start out with a loss.

Enter, the State Street Materials Select Sector SPDR exchange-traded fund. Up 23% the past three years, the ETF lagged behind the S&P 500 index by about 45 percentage points during that period. History shows this to be a good buying opportunity: After three-year periods when it lagged behind the S&P 500 by 20 percentage points or more, the materials ETF outgains the benchmark. The materials fund's average returns were 1.1 points better than the S&P 500 for the ensuing six months, and 0.2 points better over the following year, according to Dow Jones market data.

Materials stocks also look cheap at current prices. The materials ETF trades at 16.7 times aggregate analyst earnings estimates for the coming 12 months, a discount of roughly 19% to the S&P 500's just over 20 times. On average in the past five years, the materials ETF has traded at a slimmer 14% discount, according to our calculations of FactSet data.

That sets it up for gains, as long as earnings grow. Demand in the sector is sensitive to changes in the broader economy, making it "cyclical."

Cyclicality is a positive factor for materials right now because the economy is still growing moderately. The Federal Reserve, for all the hawkish speculation, is unlikely to lift interest rates multiple times, especially since the price of oil has dropped close to pre-Iran war levels. "Lower oil prices lessens the inflation concern, we end up back to the soft landing scenario we entered the year with," says Citi strategist Scott Chronert, who is sticking with his overweight rating on materials.

The materials ETF is also diversified within the sector. If one subindustry disappoints, another may perform better than anticipated. Holdings include metal manufacturers Nucor and Steel Dynamics, and copper miner Freeport-McMoRan, all of which see rising profits when metals prices increase. The ETF also owns paints maker Sherwin-Williams, which is tied to housing and consumer demand. Other holdings include industrial-gasses producers Air Products & Chemicals and Linde, which rely on demand from companies across sectors.

Overall, analysts see companies in the ETF growing sales by 7% annually from the end of 2025 through 2027, according to FactSet. That should push profit margins higher, which is partly why analysts are looking for earnings per share to grow 27% annually over this period.

Anyone who expects -- or even fears -- more tech volatility, could buy materials.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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(END) Dow Jones Newswires

July 03, 2026 21:31 ET (01:31 GMT)

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