Rare earths have become essential to the evolution of the global economy. They are key to a wide range of applications, from electric vehicles, wind turbines, and robotics to drones and fighter jets. It is no exaggeration to say that they are at the core of economic and military competition between nations.
The world’s major economies are well aware of this. The United States, for example, is introducing increasingly aggressive measures to kick-start rare earth production outside of China, which has led to a surge in the stocks of mining companies that produce these metals.
What are rare earths?
The term “rare earths” is not entirely accurate, as these shiny silver-white, soft heavy metals are relatively abundant. However, scandium, yttrium, and the 15 lanthanides do not occur as pure metals, but only in compounds that are difficult to isolate and purify. Refining them is a complex process with a high environmental impact.
VanEck explains that while the United States and Europe disregarded these metals for many years, China’s low-cost processing industry took over the market. “In recent years, this has increasingly become a problem for other countries, as rare earths are essential to the growing electrification of the global economy associated with artificial intelligence and the energy transition,” the firm states.
The investment case
Global appetite for investing in rare earths has grown because these metals are now crucial for national security, clean energy, and industrial policy. The United States, Europe, Japan, and Australia are taking action to secure supply chains through direct funding, tax incentives, and procurement guarantees. VanEck cites as an example the U.S. Department of Defense’s July acquisition of a 15% stake in MP Materials, the largest U.S. producer of rare earths.
“Investors are seeing rising demand for rare earths backed by public policies. They are an essential component of AI hardware and clean energy technologies, such as grid storage, wind energy, and electric vehicles, as well as advanced defense systems, including the F-35 fighter jet,” they assert.
Diversification
Despite this favorable tailwind for investment in these metals, the firm notes that “investing in rare earth mining and other companies in the supply chain remains risky due to geopolitical factors, trade disruptions, new export restrictions, or political instability in major producing countries.” Additionally, the firm points out that project execution also carries risk, “as some companies in the sector rely on unproven technologies, complex authorization processes, and continued public support.” For this reason, “diversification across companies is key.”
To gain exposure in this sector, there are ETFs offering high diversification in their holdings, while also providing additional returns to investor portfolios.
The VanEck Rare Earth and Strategic Metals UCITS ETF holds more than 20 positions spread across nine countries. Its benchmark is the MVIS Global Rare Earth/Strategic Metals Index, which tracks the global rare earth and strategic metals segment and includes companies that derive at least 50% of their revenue from rare earths/strategic metals.
WisdomTree, on the other hand, offers the WisdomTree Strategic Metals and Rare Earths Miners UCITS ETF, whose underlying index is the WisdomTree Strategic Metals and Rare Earths Miners Index. The fund’s exposure is focused on companies that capitalize on the growing use of metals for the energy transition and that meet WisdomTree’s ESG (environmental, social, and governance) criteria. Company selection for the strategy is carried out by experts in the energy transition metals value chain.
That said, the firm acknowledges that, since these are companies with greater growth potential—such as those involved in megatrends—they tend to trade at higher valuations. Therefore, “investors must consider the risk inherent in these higher valuations as part of any investment decision.”
