Key Points
- Rare earth elements are vital to data centers, AI, and numerous other tech applications, and ETFs focused on companies producing these materials have soared this year.
- Both EART and ION have far outperformed the S&P 500 year-to-date thanks to varied global exposure to rare earth mining firms.
- While these ETFs don't provide significant U.S. exposure, MP Materials, a unique domestic rare-earth play, has also staged a major rally this year.
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Data center business is once again booming, and investors are busy searching for ways to capitalize on a rally that has now extended into several quarters, despite some hiccups along the way. While companies building and operating data centers are a natural target for investors, an area that may get overlooked is a couple of steps removed: the raw materials and metals vital to operating the advanced chips and other components needed in data center applications.
Without the key rare earths and other materials vital to powering data centers and enabling AI, there is a bottleneck that limits the potential of this fast-growing space. It's only natural, then, that demand for these materials surges as the need for data center infrastructure grows. Below are two exchange-traded funds (ETFs) that provide broad exposure to this crucial point in the data center supply chain, as well as to a key individual stock.
A Globally-Focused Rare Earth Production Fund
The Global X Rare Earth & Critical Minerals ETF (NASDAQ: EART) tracks an index of global companies involved in the production of critical rare earth metals as well as zinc, platinum, palladium, nickel, manganese, lithium, and more. Formerly the Global X Disruptive Materials ETF (NASDAQ: DMAT), EART has around 50 positions in its portfolio. Companies based in China make up roughly 30% of the holdings, followed by U.S.-listed, British, and South African firms.
Despite its focus on critical materials, EART is not a pure-play materials sector stock, but rather also includes a modest percentage of industrials names. This means it has access to major mining firms worldwide and to other companies critical to the rare-earth production process. Across its portfolio, firms are fairly evenly weighted, with the largest position still representing less than 5% of invested assets.
EART is not a large ETF by assets, and it has a low average trading volume accordingly. However, with returns year-to-date (YTD) of about 20%, it's likely many investors may look to buy and hold shares of this fund while the data center boom shows signs of continuing, even with EART's 0.59% expense ratio.
Competitive Pricing and Performance From a Battery Metals Alternative
The Proshares S&P Global Core Battery Metals ETF (NYSEARCA: ION) is not focused on data centers or AI applications directly—rather, it aims for metals used in electric vehicle battery technology—but there is nonetheless a fair degree of overlap in terms of the basic materials in question. Lithium, nickel, and cobalt are three key components used in battery storage in computing applications as well.
Like EART, ION has a global focus (substantial rare earth and critical metals production takes place outside of the United States, so this is essential for a fund like this). More than a third of the portfolio is given over to Chinese companies, with Australia, Canada, and South Africa representing the next-largest portions, respectively. Interestingly, only about 3.3% of the fund is dedicated to U.S. names.
With almost exactly the same number of holdings as EART, ION nonetheless provides some different exposure than its rare earths-focused rival. On the other hand, it has an even smaller asset base of just over $16 million, and even lower trading volume as well.
No matter, perhaps, because ION has shone brightly in terms of performance YTD, returning about 30% since the start of the year. On top of that, it has a marginally lower expense ratio than EART as well, coming in at 0.58% in fees.
MP's Domestic Dominance Provides a Potential Contrast
Neither of the funds above provides extensive domestic exposure, but one company that may be worthwhile for investors looking for U.S. names in the rare earths space is MP Materials Corp. (NYSE: MP).
If demand continues to surge and the United States seeks independence from Chinese dominance in the rare earths space, MP may be one of the best bets. It has the only commercially viable rare earths mining and processing site in the country, located in California.
MP has consistently been a favorite among Wall Street analysts, who nearly unanimously give it a Buy rating. Despite rising by over 30% YTD, shares of MP could also extend that rally further—analysts assign a consensus price target of more than $79, suggesting another 15% or so in upside may be possible. Though other firms may try to threaten MP's dominance, the reality is that there are limited rare earth resources in the United States, and this company has a key advantage in already establishing operations.
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