Investing in Rare Earth Elements: A Comprehensive Guide

Rare earths are key components in many modern devices, including rechargeable batteries; flat-screen televisions and computer monitors; catalytic converters, etc.

Investors can capitalize on this trend by purchasing mining companies or exchange-traded funds that give exposure to rare earth metals, but it's essential that investors fully consider all aspects of investing in them first.

How to Invest in Rare Earth Elements

Investment strategies involving rare earth elements include purchasing shares of mining companies that produce them; investing in companies that recycle or manufacture products using rare earth elements; and even some robo-advisors offering Environmental, Social and Governance (ESG) portfolios containing rare earth element stocks.

Investment in rare earth elements carries inherent risks, and that is especially true of rare earth investments. They can experience price volatility just like any commodity would, while there may also be political dangers such as China holding a monopoly over rare earth supplies, which requires investors to pay premiums in order to guarantee supplies from outside China.

As such, investors in rare earths must carefully consider their investment choices prior to making any decision. They should keep in mind that no physical-backed financial instruments exist that allow investors to participate in this market.

As one option to diversify their portfolio with rare earths, investing in an ETF could be one way. Unfortunately there aren't any rare earth ETFs listed on the Australian Securities Exchange (ASX), however there are a couple of overseas funds with exposure in this sector such as VanEck Rare Earth/Strategic Metals ETF and UBS STOXX Global Rare Earth ETF which offer investors exposure.

There are also companies that specialize in the exploration and production of rare earths, many of them located in Australia to reduce dependence on China for supply. Such firms include Arafura Resources (ASX: ARU), Leading Edge Materials Corp. of Canada (TSX-V: LEM), and Northern Rare Earths Ltd of Australia (ASX: NRE).

Investors can purchase rare earth oxides directly from metal traders. These materials typically come in batches of one or ten kilograms. It is important that investors store these materials correctly in order to protect their value; to do so, it is advisable that investors utilize a professional storage company with secure facilities in Switzerland outside the banking system that offers certificates of ownership.

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Resources

When investing in rare earth metals, you must recognize that they are commodity investments - meaning they do not trade on stock exchanges like stocks and bonds do and their price can fluctuate widely.

These rare metals, including terbium and dysprosium, can be difficult to obtain and their mining process poses major environmental hazards. Their uses range from smartphones to flat screen TVs; but they're also crucial in moving towards renewable energy technologies that promote greener practices.

As such, many investors look toward rare earth mining companies as an asset class to diversify their portfolios. But it is important to remember that share prices for mining companies differ significantly from spot prices of rare earth metals themselves and both can increase or decrease over time, making a balanced portfolio that includes other asset classes more desirable.

Mining rare earths is both complex and costly, with most coming from just a handful of mines around the world, including China with major producers like Bayan Obo and Baotou mines. While some rare earth production is found here in America as byproducts from other mining operations looking for more precious metals, most rare earth production comes from Chinese mines alone.

Due to their unique properties, rare earth metals often offer higher returns than other commodities; however, due to high demand and scarcity risks they are considered riskier investments for small retail investors. Rare earths investments should generally be seen as long-term commitments as demand for these elements is expected to rise substantially over time.

Investors seeking exposure to rare earth metals can do so through mining companies or exchange-traded funds (ETFs). One such ETF, Market Vectors Rare Earth/Strategic Metals ETF (REMX), may provide exposure; though not exclusively so; as it also holds exposure for cobalt, molybdenum, titanium and lithium stocks. Another approach would be using an automated robo advisor with an environment, social and governance portfolio like Betterment or Wealthfront which typically have some exposure for rare-earths companies but be wary as these portfolios may contain some controversy related to rare-earths companies in past.

Markets

Rare earths are essential materials used in the production of hybrid and electric vehicles, green energy technologies and other high-tech products, thus increasing demand over the next decade. As prices increase to meet this growing demand, producers and mines of rare earths may benefit.

Rare earths can be risky investments for investors as a commodity that trades at volatile price ranges. Furthermore, production tends to be concentrated in certain countries such as China making diversifying exposure difficult for investors. Furthermore, rapid technological development could alter demand patterns and pricing pressures within this industry.

The COVID-19 pandemic had an enormous effect on this industry. Manufacturers were forced to close their facilities for fear of furthering its spread; once these lockdowns were lifted, demand rose quickly again - returning back to pre-pandemic levels.

Rare earths stocks offer investors with an appetite for risk strong long-term returns; however, before investing, investors must carefully consider their financial goals, situation, investment strategy, time horizon and risk tolerance before purchasing rare earths stocks.

If you're considering investing in rare earths, look for mining corporations with proven success, robust exploration and mining techniques, and reasonable market shares - such as MP Materials Corp (NYSE: MPM), Rare Element Resources (REEMF) in the US or Lynas Rare Earths (ASX: LYC).

Exchange-traded funds (ETFs) provide investors with a more diversified exposure to rare earths industry by tracking its performance through different market segments such as rare earths. One popular ETF is VanEck Vectors Rare Earth/Strategic Metals ETF (REMX), which gives an investment with diverse exposure across companies that generate revenues in this sector.

Companies

Investment in rare earth mining companies may be the easiest and most accessible way to enter this market for the average investor. These firms specialize in mining rare earth metals from underground deposits before selling them on to manufacturing firms for further use. But investors should keep in mind that commodities can fluctuate in value with economic cycles and price volatility affecting them too.

Rare earths don't trade like other commodities do - investors must invest directly into the companies producing rare earth metals to sell to manufacturers or purchase shares in exchange-traded funds (ETFs) with an assortment of mining companies as their holdings.

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MP Materials (MP), one of the few major producers of rare earths outside China, owns Mountain Pass Mine in California and has seen its share price increase by over 80% this year while its ETF gained nearly 8%.

VanEck Vectors Rare Earth/Strategic Metals ETF (REMX). This ETF offers exposure to several mining companies producing rare-earth metals, and has gained over 40% in 2018.

Investment in rare-earth metals mining companies may be risky, but its greatest advantage is diversification. This alternative asset class provides you with a chance to offset some of the risks associated with traditional investments like stocks and bonds.

Investors should keep in mind that rare-earth elements aren't as rare as their name might imply. These 17 metallic members of the periodic table are used for optical, magnetic and catalytic properties as well as being integral parts of green technology; as a result, investors should anticipate continued high demand in future years.

Rare-earth mining companies also face political and environmental risks. Because rare earth metals aren't as abundant, environmental regulations may apply and mining may lead to habitat destruction or waterway closure. Furthermore, many rare-earth mining operations operate overseas where politics can influence business decisions.