Why This Rare Earth ETF Excludes the Biggest Rare Earth Market

Would excluding China from a rare-earth-elements ETF make it even rarer?

A forthcoming ETF from Sprott Asset Management poses that question. Earlier this month, the company filed the Sprott Rare Earths Ex-China ETF (REXC), a fund that could launch by April, trading on the Nasdaq. It would add to a line of critical materials and energy transition exchange-traded funds the company already offers, with the nuance being that it avoids exposure to the world’s largest source of rare earth elements. 

“This is a niche offering that is playing on the combination of the demand for ex-China offerings and the US’s push for less reliance on China for rare earths,” said David Carey, equity strategies analyst at Morningstar Research Services. “The vast majority of rare earth materials are made in China, so by excluding some of those big players, you’re left with a smaller pool that’s [composed] of mostly small- and mid-cap companies.”

Sprott Price 

The rise in demand for rare earth elements comes amid rising energy usage globally, driven by electrification, and a jump in the sprawling data centers tech companies are building to support their AI efforts. As Sprott notes on the site for its critical materials ETFs, more than 100 countries have committed to net-zero emissions by 2050, which is shifting energy reliance from fossil fuels to renewables. President Trump has essentially canceled the US’s net-zero commitments and is pushing for more energy from coal and wider use of oil. 

At the same time, the big tech companies with ever-increasing appetites for energy have acknowledged that the heightened demand will likely be met by a diversity of sources, including wind, solar and nuclear. “Ex-China fund launches over the past few years have exploded, particularly in the diversified emerging market Morningstar category,” Carey said. “The geopolitical tensions between the US and China have driven modest demand for these funds over the past few years, though they’ve been slow to garner many assets.”

A couple of the existing rare-earth element ETFs on the market:

• The $2 billion VanEck Rare Earth and Strategic Metals ETF (REMX) has returned 109% over a year.
• Sprott’s $380 million Critical Materials ETF (SETM) returned 114% over a year.

May Encounter Turbulence: Notably, Sprott already has a line of seven US ETFs focused on the energy transition, and the forthcoming one adds an extra flavor. “I think they’re taking an existing product and putting a different spin on it,” said Todd Sohn, senior ETF and technical strategist at Strategas Securities. “They’re taking the long game on this one. It will be volatile.”