I’ve been covering the ETF industry long enough that I was around for the debut of the first rare earths ETF. That was nearly 16 years ago and back then, the case for investing miners of these crucial commodities revolved largely around military and consumer-facing technology gadget demand.
I still remember the research highlighting rare earths’ essential places in the production of night-vision goggles, missile systems and smartphones and tech gizmos. That’s still the case today, but the 17 rare earth elements now have a host of other demand drivers, including artificial intelligence (data centers), clean energy technology, electric vehicles and robotics.
Add to that, love him or hate him, President Trump is prioritizing a shoring up of U.S. access to dependable rare earths supply in an effort reduce Chinese dominance over the market. And yes, it’s about much more than acquiring/invading Greenland. For example, the administration invested $1.6 billion in USA Rare Earth (USAR) earlier this year.
So it’s a good time to refresh the rare earths investing proposition. The WisdomTree Efficient Rare Earth Plus Strategic Metals Fund (WDIG), which debuted on May 7, does just that.
Digging Into WDIG
In the rare earths ETF space, WDIG is unique because it has the latitude to hold both stocks and commodity metals futures contracts. It’s a strategy comparable to that of the WisdomTree Efficient Gold Plus Gold Miners Strategy Fund (GDMN), which holds shares of gold miners and futures contracts. It’s worked well because GDMN has gained traction with advisors and investors.
As it relates to WDIG, the futures plus stocks methodology is potentially attractive to end users because with so many new end markets for rare earths, supply/demand imbalances are emerging and that creates opportunity.
“With mining projects facing decade-long development timelines and governments and corporations racing to secure upstream assets, investors can access this emerging supply-demand imbalance through WDIG's combined exposure to metals futures and strategically positioned mining equities,” notes WisdomTree’s Christopher Gannatti.
Potentially adding to the appeal of WDIG’s novel approach to rare earths investing is that the those supply/demand imbalances aren’t easily solved. Demand isn’t dissipating. It’s growing, but it takes years to bring a new mine online.
“The International Energy Agency (IEA), for example, notes that demand for critical minerals such as lithium, nickel, cobalt and rare earth elements could increase several-fold as electrification and clean-energy technologies scale globally, while new mining projects often require 10–20 years to move from discovery to production,” adds Gannatti.
How WDIG Works
Understanding how WDIG works is essential, though not difficult. Say an investor puts $100 into the ETF. They get $90 worth of exposure to mining equities and $90 in notional exposure to futures contracts with the remaining $10 directed to Treasuries that serve as collateral for the derivatives.
Translation: this isn’t your typical equity-based ETF nor is the metals sleeve backed by physical holdings as is the case with some commodities ETFs.
“If the modern economy is increasingly built on critical minerals, investors may want access not only to the metals themselves, but also to the companies bringing those materials to the surface. WisdomTree’s capital efficient construction takes away the need to choose only one or the other,” concludes Gannatti.
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