Rare Earths: Critical Elements at a Critical Moment

July 16, 2026 | (61 mins 09 secs)

Rare earth elements are becoming increasingly important to national security, AI, defense, energy and advanced manufacturing, yet global supply chains remain heavily concentrated in China. In this webcast, Steve Schoffstall, Managing Partner and Head of ETFs at Sprott, discusses the growing strategic importance of rare earths, the global push to build ex-China supply chains and the investment implications of rising demand driven by defense spending, energy infrastructure and emerging technologies. He also shares insights on the Sprott Rare Earths Ex-China ETF (REXC) and why Sprott believes rare earth producers outside China may be well positioned to benefit from these long-term trends.

For the latest standardized performance and holdings of Sprott Rare Earths Ex-China ETF, please visit REXC. Past performance is no guarantee of future results.

Video Transcript

Steve Schoffstall, Introduction Slides 1-4

Kirsten Chang: Hello everyone, and welcome to today's webcast sponsored by Sprott Asset Management. I'm Kirsten Chang, Senior Industry Analyst at VettaFi, and today we're talking all about Rare Earths: Critical Elements at a Critical Moment. We'll start by giving you context on rare earths and why they matter, dive into their role in national security and emerging technologies, talk about how China's dominance and export restrictions have shaped the supply chain, and tell you how government policies and industry responses are creating investment opportunities specifically in ex-China rare earths. 

Allow me to introduce today's presenter, Steve Schoffstall, Managing Partner and Head of ETFs at Sprott. Steve, it's great to see you again. Hope you're managing to stay cool in this sweltering heat sweeping the nation here. I don't think any of us are unscathed.

Steve Schoffstall: It's great to be back. Thank you. 

Kirsten Chang: We're glad to have you today. Why don't you start by giving us the Sprott story? You have had some very methodical rollouts over the last decade. Tell us a little bit more about the types of funds you offer, and then give us the lay of the land on rare earths.

Steve Schoffstall: Thank you for the introduction. For those that aren't familiar with Sprott, we're an asset manager with about four decades of experience. We principally focus on metals and mining, where our expertise really lies, and we have high conviction in that space.

In the U.S., we offer 13 ETFs focused on metals and mining. We have two actively based strategies covering gold and silver mining. And we have an active, broader, diversified ETF that covers several different critical materials, one of which we'll talk about today: rare earths. Altogether, we have about $65 billion in assets, including managed equities we run for clients and private strategies related to the mining and resource industries.

Steve Schoffstall, The Rare Earths Investment Case: The Strategic Demand Imperative, Slides 5-19

We’ll get right into rare earths and apologize out of the gate if anyone has flashbacks to high school chemistry class. I promise this won't be a science lecture, but what we find from investors is that there isn't much deep knowledge in the rare earth space because it is so niche, though it is becoming much more mainstream over the last 12 to 18 months. We'll take a moment here to level-set and define: when we talk about rare earths, what do we mean?

It's a group of 17 chemically similar elements found on the periodic table. They're typically classified as heavy rare earths or light rare earths. Those classifications are based on each metal's atomic weight. Given their properties, they're indispensable and irreplaceable in many high-tech applications. Despite the name "rare earths," they are not rare. They are found in relatively large quantities throughout the earth's crust. What makes them rare is finding them in concentrations large enough to be mined profitably. And that's what makes having these resources so important from a security standpoint.

Light rare earths are widely used in magnets and catalysts. We see them used for glass polishing and many other everyday applications. Typically, heavy rare earths are more valuable because they are scarcer and essential to high-performance, high-temperature applications and technologies. We'll talk through some of those applications. One of the challenges we face in ramping up rare earths production is that, because they are so chemically similar, separating them is extremely difficult, and that process is one of the hardest to perform chemically.

We'll talk through the implications of some of these characteristics as we move forward, but we'll leave the science lesson behind and take a quick look at how they fit into the broader critical materials landscape. This is probably one of the questions we get asked most: are rare earths critical materials, or are critical materials rare earths? The simplest way to say that is that all rare earths are critical materials, but not all critical materials are rare earths. We tend to think of critical materials as a broader umbrella term for many different metals. Rare earths are an important subset of that umbrella.

They do make up many critical materials, and we'll use the term "critical materials" throughout the presentation. The main driver of whether something is critical is its importance to national and economic security. And then secondly, if it is prone to supply disruptions. We'll talk about how countries view critical materials, particularly rare earths. And then also what that means for policy decisions in the investment case. 

A lot is happening on this slide (slide 8). We won't cover everything here, but the main goal is to show how interconnected many of these rare earths are. NDPR: If you look at the third and fourth squares at the top with the periodic symbol, those are neodymium and praseodymium. They get a lot of attention because of their use in permanent magnets. When we talk about permanent magnets, we're just talking about very strong magnets that can keep a persistent magnetic field without having to have any external energy source. And this is one of the things that makes them so valuable. Rare earths make the strongest commercially available permanent magnets. 

If you're thinking of a fighter jet, for example, it allows them to be smaller and lighter and to use more efficient motors. We see this throughout military equipment and EVs, where they're heavily used. Rare earths are used in the motor to help propel an EV forward. And then they're also used heavily in wind turbines. The motors are constructed from rare-earth materials. This is not only an efficient way to generate electricity from wind turbines, but it also keeps maintenance costs and downtime much lower because it doesn't have the traditional maintenance schedules you might see with other motors. 

We'll talk a bit about some of the uses as we go. We won't touch on everything here, but one of the reasons we really like this graphic (slide 9) is that it just shows how much rare earths touch everyday life, not just from a defense perspective, where we do see rare earths are used in missile guidance systems, drones and satellites. We see rare earths used in anti-missile defense systems. As the conflict in Iran continues, a very significant portion of what we're seeing is talk centered on rare earths as we start to use our anti-missile defense and guided missile systems, and on replenishing those stockpiles. We'll talk about that a little later as well. 

On the technology front, we see it in autonomous cars, lasers and humanoid robots, which is one of those areas that, if you think back to the movie iRobot and saw them running around with Will Smith, is expected to grow rather significantly. And Morgan Stanley estimates that by 2050, the market for that may surpass about $5 trillion with nearly a billion robots, particularly in industrial and commercial applications. Think about warehouse operations where they'd be able to move objects from point A to point B by themselves. Each humanoid robot would require about 4 to 9 pounds of rare earths to operate. And then we'll talk through some other aspects of the economy as we move forward, and how they're used. But with that, Kirsten, I'll kick it back to you for our first polling question.

Kirsten Chang: Thanks so much for that perfect setup. And I was enjoying the science lesson. We'll pull up our first poll of the day to get the audience's input. We'll give everyone just a few more seconds. Which of the following do you believe will be the primary driver of rare earth element demand in client portfolios over the next three to five years? Defense, AI, energy transition or consumer electronics? And take a few minutes to mull that over because I know there's a lot there. And Steve, I don't want to bias the poll, but is there a category you think advisors consistently underestimate in terms of the raw tonnage of rare-earth demand?

Steve Schoffstall: AI is probably one where investors don't readily conclude there are many rare earths in that application.

Kirsten Chang: Which of the following do you believe will be the primary driver of rare earth element demand in client portfolios? And it looks like the survey says: 40% say defense, driven by NATO, next-gen weapons systems, and geopolitics; 43% say AI; and 16% say energy, with 0% saying consumer electronics. Any quick reaction to this, Steve? Go ahead and give us the hard data here.

Steve Schoffstall: We'll flip to the next slide (slide 13) to show some of the results. It's one of those things that touches all of these. There were many good guesses, and this is consistent with what we've seen from investors. They're starting to understand the importance of rare earths, but understanding how they're used and what the implications are, not only from national security, but economic security as well, is becoming increasingly important from an investor's point of view. Significant investment is happening in defense and the energy transition.

AI accounts for a relatively small share of rare earths, but it is growing quite rapidly. Once you put these three core uses together, just in these areas, we're spending over $5 trillion globally each year over the last two years. A very significant amount of money is being invested not only by private companies but also by the government. This is so important because, as these strategic uses grow in importance to overall demand for rare earths, they can eliminate the cyclical nature we tend to see with many commodities.

Price sensitivity can decrease. You might see periods when economic growth slows, but at the same time, we would expect rare earths and other critical materials to hold up much better than they would have 10 or 15 years ago. Given the level of investment across these three sectors, securing the supply chain is increasingly important. This is something we'll talk through, and we'll explain why we choose to focus on ex-China abilities as we move through this conversation.

From a defense perspective, there are many uses of new military technology. Modern defense isn't possible without rare earths because they are such high-performance materials. If we look at magnets used throughout the defense sector, about 50% come from rare earths and the permanent magnets we discussed. When you look at some of the non-magnetic uses around defense infrastructure, communications, satellites, fiber-optic networks, lasers, radar and sonar, all of these are important not only for projecting power but also for defensive measures. We expect significant growth in the defense industry in the coming years.

And the bill making its way through Washington includes an increase in defense spending from about $1 trillion to $1.5 trillion in the next budget year. A very significant amount of investment is happening there. And at the same time, we're seeing growing talk of invoking the Defense Production Act, which would order manufacturers to increase production of missiles and anti-missile defense systems. Both of these are very significant users of rare earths. When you start looking at guided missile systems, that is where we see those permanent magnets used. And that's what allows the missile or projectile to steer throughout the air, by making these little tweaks with permanent magnets. It's used in navigation and precision targeting, as well as in the very precise movements that make them possible. 

The defense spending is not just a U.S. initiative. On the right (slide 15), we show a chart of global defense spending dating back to the late 1970s. The darker blue line, which declines throughout most of the '90s, represents the share of GDP that world governments invest in defense, and it fell well below 2.5% for the better part of two decades. We're seeing a significant move higher, particularly after NATO agreed to double its spending from 2.5% to 5% of GDP. Most of the NATO countries have agreed to that. We see a rapid increase in global defense spending over the last decade, now totaling about $2.6 trillion per year. This area highlights the importance of securing domestic rare earth supply chains.

One of the things we didn't touch on much earlier, when we talked about some of the uses, is consumer electronics. In one of the poll questions, we had zero people expecting to see growth from this. When you look at a smartphone, some of the metals referenced here are critical materials, not rare earths. A lot of what makes a smartphone so valuable, important and easy to use is due to rare earths. The display itself is made possible by the touch-screen aspect and the vivid colors that come through, using rare earths. The things that make your phone vibrate, earbuds and microphones all contain rare earths.

A very significant amount of rare earths goes into each of these phones. And while it's not a lot in any one phone, when you start looking at the billions of smartphones that are sold each year, it's fairly easy to see how quickly the demand from consumer electronics alone, from something like a smartphone, let alone TVs and monitors and computers, can really start to impact global markets. Another area where we've seen significant growth is in AI data centers and the rapid buildout underway. Hyperscalers are increasing investment in this space.

The five largest hyperscalers have committed to spending $400 billion by 2025, and significant growth is happening in the AI space. One thing that often gets lost in the race to become the AI data center leader is the critical materials and rare earths needed to make it happen. Whether it's nuclear energy and the uranium needed to power many of these data centers, as hyperscalers increasingly turn to that reliable baseload power, we see it with copper throughout a lot of the infrastructure. But where we see rare earths is in magnets so powerful they can help these data centers cool much more efficiently.

And that's extremely important because cooling a data center accounts for about 20% of a data center's electricity costs. Keeping those cooling costs low allows these data centers to reduce their electricity costs and keep their costs lower. We also see it used in the storage infrastructure of these data centers and in semiconductors that have to operate at extremely high capacity. We also talked earlier about fiber-optic uses and communications, where we're seeing a lot of rare-earth elements come into play.

When we broaden our view to the energy sector, several areas significantly affect rare-earth use. The first would be EVs, where we're seeing that it has to be used in the motor. And I think one thing that often gets lost on a lot of U.S. investors is that because we're not seeing overwhelming EV sales in the U.S., particularly what projections we're showing, is that in many parts of the globe, EV sales are remaining very strong. We see it throughout Europe, China and other parts of Asia as well. A very strong, robust market there, which we're not necessarily seeing in the U.S., which is likely moving toward hybrid usage rather than EVs, as the next stepping stone from gas-powered to EV-powered hybrids.

Another sector that uses a lot of rare earths is the wind turbine industry. This is in the motors of each wind turbine and in the demand for magnets in clean energy applications. We have reported growth rates of 300%+ for many of these rare earths. It's a very significant portion, as we expect the need for rare earth magnets to double by 2050 in clean energy technology. That's an area where, across Europe and Asia, many countries are moving to clean energy, perhaps at a faster pace than we see in the U.S. And I think the best illustration of that is China and what they're doing in clean energy generation. 

On the right-hand side (slide 19), we show the percentage of global clean energy from China and how quickly they're ramping up clean energy production. This isn't necessarily for the typical clean-energy uses you might expect. China is building large solar farms powered by nuclear and wind energy. This is more of an energy security move than a clean energy move. And I think that was very much on display when the Iran conflict started, and we saw the tightness in the oil market. We're reading articles and hearing on the news how important the Strait of Hormuz is to China, specifically because it's a major oil route for them.

By diversifying clean energy, they're using it as a way to enhance national security and reliability. The other aspect of clean energy is that, in many cases, once you have the infrastructure in place, you're not necessarily as trade-dependent as you are with oil and gas markets. When the fighting broke out in Iran, we saw natural gas prices in Europe spike by about 70% — a significant supply shock. We saw a similar reaction coming to Europe when the Ukraine war started as well, and we saw natural gas disruptions there. Sometimes, countries like Germany will revert to burning coal rather than natural gas because they haven't fully built out clean energy infrastructure. In Germany's case, they've turned away from nuclear energy and from clean energy technologies that use rare earths, which don't have the same issues we see with fossil fuels. 

Steve Schoffstall, The Rare Earths Investment Case: National Security in a China-Dominated Supply Chain, Slides 20-33

We'll take a look at China's role here. I did see a question come in asking, 'Why are we looking at this from an ex-China perspective?' It's a very good question, and we'll address it in the coming slides. But let's take a quick moment to go back to the '60s and '70s and see what's happened to the rare earths market. This was a market dominated by the Mountain Pass mine in California, which accounted for the majority of global rare-earth production from the '60s through the 1990s. This is a time when a Chinese government official famously said that the Middle East has oil and China has rare earths.

They realized as early as the 1990s that rare earths would be a very important material. And they set their sights on acquiring that technology. They would bring many U.S. scientists and companies to learn how to process rare earths. And what happened was that once they gained that knowledge, they began purchasing many of the rare-earth companies in the U.S., and over time, they started moving some of those operations and the supply chain back to China. They were able to close down operations in the U.S., and then we woke up in the 1990s to find an industry that was once dominated by the U.S. now owned by China.

20 years ago, they accounted for only about 50% of permanent magnet production. Today, they account for about 94% of that production. They were very successful in taking over that supply chain and keeping other countries out. The U.S. now accounts for about 13% of rare earth production, and we rely on China for about 67% of our demand. It's a very important choke point. And three weeks ago, we saw that China is using export controls in the rare earths industry, particularly against Japan and the U.S., making it impossible for rare earths to reach the U.S. for military purposes.

It's becoming increasingly difficult to source rare earths, which makes China's dominance all the more concerning from a national security perspective. We won't spend a ton of time going through the timeline of trade actions we've seen from China. Still, the main takeaway from this standpoint is that China is not shy about using its position of control to put pressure on other countries with which it might have trade disagreements. In the early 2010s, for example, China halted all rare-earth exports to Japan. We saw significant price spikes as a result.

Some of what we're seeing with these export controls isn't just about countries trying to buy the material from China. It goes further downstream than that: for example, if a company in India were to purchase rare earths or magnets from China, those purchases would fall under export restrictions if more than 0.1% of the magnet's material value originates in China. These are very far-reaching, well beyond China's borders, and they ensure they sit at the top of the supply chain, which is why this has grown into a national security risk over the last couple of years.

In the 2010s, China cut off exports of rare earths to Japan, and you can see the price spike that ensued as Japan had to go elsewhere for its rare earths (slide 23). This caused prices for many of these rare earth materials to increase by about 26 times. One of the main things to take into account here is that, given their dominance, as you can see in the late 2010s and early 2020s, whenever prices start to rise, they're able to control prices by either sending more material to the market or taking material off the market. This makes it very difficult for non-Chinese companies to compete and set up their own production, whether it's mining or more midstream or downstream. 

It's been an important lever we see across many critical materials from China. Things are changing on that front as we'll walk through here in a little bit, but it's an area of concern that's helped crowd out a lot of investment from other countries. There's a shift that's really starting to take hold here. This is probably one of the few areas where we're seeing governments around the world, outside of China, that are very much coordinated on. There's a change in the geopolitical landscape, and although China will remain a major player in the rare earths sector, we expect its grip to loosen over the coming years. 

We expect it to remain one of the top three producers of rare earths, but its market share will decrease. We'll also show a map of where some of these elements can be mined. But as we see that other countries are bringing on domestic supply chains, we expect to see China’s position decrease, not only in the mining front, which is on the left-hand side of the chart (slide 24), but also, to a much lesser extent, but very importantly, in refining and magnet production. But in the mining piece, the expected decrease in their mining share is due to growth in mining. So many resources are in high demand.

We'll talk about how countries are reacting and why it's now an important time to diversify away from China. Rare earths have become a top energy priority worldwide. If you were to look at critical materials lists, and they're called different things, some countries call them critical materials, strategic minerals, strategic materials, it's all essentially the same thing. There can be dozens of metals on these lists that countries have identified as economically and nationally important, but also at risk of supply chain disruptions. You can see here all the countries highlighted in black that have rare earths on their lists of critical materials. 

On the right-hand side (slide 26), just at the bottom of the star, which has shifted a bit, rare earths rank amongst the highest global supply risk and the most vulnerable from an economic standpoint. Put another way, what's the most important to the global economy and the most at risk? Rare earths rank among them. Ideally, we'd like to see metals in the lower-left quadrant here, with rare earths firmly in the upper-right quadrant. This is at very high risk, not just for defense but also for the global economy. The administration has had a lot of movement over the last 18 months or so since President Trump's been back in office.

Even in the Biden administration, particularly for copper and uranium, the U.S. was starting to wake up to how important this issue was becoming. Still, we've seen significant movement over the last 18 months. The U.S. government is looking to work with other nations that have abundant rare earth resources. China accounts for about 48% of the world's rare earth reserves; Brazil, about 23%. Greenland has about 2%, which is just a little under what the U.S. has. Some of the reasons you were hearing the administration talk about Greenland were its critical materials and rare earths. The goal there was to get mining up and running in that country. We also see 

Australia has a considerable amount of rare earths, accounting for about 6% of global resources. Still, these are countries where the U.S. and its allies are working together, whether it's through stockpiling to create national stockpiles that not only governments but also private companies can use. But at the same time, they're also making loans available to private companies to go in and mine and produce these materials, whether it's through the “mine to magnet,” which is what they're looking to secure the supply chain for, from when it comes out of the ground until its final use.

A lot of the discussions we're seeing in Europe right now around these trade agreements are the same ones the U.S. has already entered into with Australia and Japan. Many of these agreements are setting the stage to take China out of pole position in rare earth production. They'll continue to produce and remain the largest producer, but if we can get that production to a point where it's less of an economic and national security risk, that's the end goal.

One particularly new way in the U.S. to combat this is by instituting price floors. With MP Materials, for example, a U.S.-based company looking to produce rare earths and magnets. The U.S. Department of War actually stepped in and said, "Listen, we'll guarantee you a price of $110 per kilogram for NDPR magnets. We've been doing that for over 10 years. If you're able to find somebody else who will pay more than that, have at it." But the moral of the story is that the Department of War will step in as the sole buyer if no other buyer exists.

These price floors we've seen used with Lynas Australia, a very similar deal that they've signed with a Japanese company. I think we're probably moving away from price floors. I don't think we're going to see it run rampant throughout critical materials and rare earths. These indications are often one-off situations, but they show how important this is for building the new industry we've seen emerge. More to come on these, as this is different from what we've seen historically from U.S. administrations.

I mentioned the export controls that China recently enacted, as recently as this past June. As you recall from that chart, we typically see price spikes. When you go back to April, when China imposed many export restrictions on heavy rare earths, we saw very significant price spikes for many of these rare earths. Yttrium, for example, is trading at about $9 per kilogram within China for Chinese-sourced material. Material outside of China trades at over $1,600 a kilogram. It's about 180 times more expensive to buy yttrium outside China than inside China. 

This is one of the things companies and governments will have to solve for. It incentivizes new ways of producing, whether through new companies entering the market or expanding production. Still, it also incentivizes companies to get up and running so we can get back to more normalized pricing. What we've seen is that these premiums outside of China, as we saw with silver and copper last year, are really becoming a feature of these markets, this price bifurcation. And it's not something we expect to go away in the near term. 

And just one more slide here before we kick it back for our next poll question. Some of the deals that we've seen come out, I touched on MP Materials, for example. This was a $400 million equity investment that gave the U.S. government a 15% stake in the company. We talked about the price floors. MP also disclosed that the U.S. Department of War was going to provide a $150 million loan to expand production at Mountain Pass, with $1 billion from JP Morgan and Goldman Sachs. This is not just a government initiative. We're also seeing private companies come in. USA Rare Earths had similar deals, and Apple is committing $500 million to MP Materials. Outside the U.S., Australia is taking similar action for its Australian-based companies. But with that, Kirsten, I'll kick it back to you for a moment.

Kirsten Chang: Thanks for breaking that all down for us. Let's bring up another quick poll to give you a chance to catch your breath. How do your clients generally prefer to get exposure to critical materials and strategic sectors? And this is an investment question about ETFs, whether it's focused on pure-play thematic ETFs, broad critical materials ETFs, direct physical exposure, or traditional broad-market equities and mutual funds. Steve, you mentioned the commitment many of these Western nations have made to increase refining capacity to compete with China, but we have a question from Michael. Any meaningful progress or results so far?

Steve Schoffstall: It's different than if you were to increase automobile production. If you were going to do that, you could change your operational approach to increase car production. When you get into mining, it's very difficult to quickly increase production. What you really need to see is the capital start flowing. That's the piece we're seeing: the capital moving. Generally speaking, when you look at the mining of new metals, it takes about 16 years on average to go from a discovery to production. It's not going to be a flood of money into the sector, and three years from now, we'll be flush with rare earths. This is going to be a multi-year move and shift. The other aspect is that, when the U.S. lost its leadership in rare earths production, much of the workforce involved at the time has since retired and moved on.

Technology has also changed in relation to separation. And that's another aspect where we see China really cracking down not only on rare earths and on sending out magnets and production, but also on limiting access to separation knowledge and techniques. They're not allowing that to leave China as well. It's going to take some time. I think the first step we're seeing is moving past government rhetoric and toward action, with money flowing and companies making real investments to reshore much of this production.

Kirsten Chang: How do your clients generally prefer to get exposure to critical materials and strategic sectors? And it looks like 45% say broad critical materials ETFs like copper, lithium, and uranium and 19%, about a fifth, say focused pure-play thematic ETFs. And let's say 30% in traditional broad-market equities or mutual funds. Steve, looking at these results, how does this align with the conversations you're having with advisors, and how are you thinking about solving this allocation headache with the fund?

Steve Schoffstall: This is similar to what we see in these conversations. I think direct physical exposure related to critical materials is a relatively small market. We have physical uranium and physical copper trusts. Aside from uranium and copper, it's very difficult to get that physical exposure in exchange-traded strategies. If you have access to private strategies, you might have some ability in that area. I think the thematic, very focused approach tends to be for investors with very high conviction in one metal over another. But in an area where we're now seeing about 65% of advisors investing in our broad critical materials ETF. 65% of the investors in that are advisors, as they're leaning towards a one-ticket solution to getting critical materials exposure that allows advisors to do one of two things.

One, you don't have to be an expert in any one critical material. You can benefit from a basket approach. And then two: if you only have the option to dedicate one ticker to critical materials, we see them going that route. One fund we have is the Sprott Critical Materials ETF (SETM), which has a lot of advisor following. In the traditional broad-market approach, if you look at many of the underlying holdings, even when investing in energy ETFs or strategies, you'll often see that critical materials are underrepresented. And to the extent that they are underrepresented, mining companies tend to be underrepresented.

Kirsten Chang: With that, tell us more about the fund.

Steve Schoffstall, Sprott Rare Earths Ex-China ETF Fund Overview, Slides 34-38

Steve Schoffstall: We'll introduce the Sprott Rare Earths Ex-China ETF (REXC). This is a fund that we launched in April. What makes this fund so special is that, among all U.S. ETFs, it is the only ETF with focused exposure to rare earths. And its primary focus is to invest in pure-play companies. We deem a pure-play company to be one with at least 50% of its revenue or assets dedicated to the mining, separation, refining or production of rare earths. That includes some development and exploration companies, which tend to be smaller-cap names out there looking for this material. 

When you start looking at other ways to gain exposure to rare earths, I mentioned SETM, a basket-based approach. In there, you might get about 15% exposure to rare earths. Many competing ETF strategies often include "rare earths" in their names. But when you look under the hood, and this is probably my greatest cautionary tale for investors, if there's one thing you take out of this conversation, it's look past the name of an ETF. Understand what you own because a lot of these other strategies that brand themselves as rare earth strategies could have somewhere between 15 and 30% rare earth exposure. If you contrast that with what REXC provides, it's up around 96% exposure. 

Much of the exposure you'll see in other strategies also comes from China. We do not have that exposure to China. Pretty much A shares, B shares, H shares and any depository receipts of Chinese-based companies listed outside of China are excluded from this strategy. And to the question of why we exclude China, one of the biggest things we set out to do when we launched our critical materials suite about three years ago now was to look at the landscape, and what we really wanted to understand was which metals had a favorable long-term supply-and-demand outlook. And then, where do we expect that growth to come from? 

And what that kept pointing out is that we expect Western nations to finally realize and wake up to the fact that they can't rely on any one country, particularly one that can be adversarial at times, to supply these critical materials to markets. And we expected investment to accelerate outside of China. We're seeing that play out now, particularly with rare earths. And that's why we've gone the ex-China route. From this standpoint, we expect to continue seeing investment for the foreseeable future as we build out these supply chains. When you look just at the U.S., there are a few issues that seem to bring both parties together. I think one of those issues is the increasing vulnerability of the supply chain for critical materials.

This is something we saw happen with nuclear energy about five years ago, even though Republicans have traditionally advocated for it. We've seen significant strides in nuclear energy during the Biden administration. The presidents are switched this time. It's the Republican administration moving the critical materials train forward, particularly regarding rare earths. I see a lot of bipartisan support on this standpoint. We do think that by focusing on those pure-play companies, they will be best positioned to benefit from this increased investment, right? There are several ways you could invest in rare earths across the supply chain. You could go downstream to magnet manufacturers. Again, there's no pure-play fund out there. You could get that through some other strategies.

But at the end of the day, all of this material has to come out of the ground, and the mining companies are doing that. While we expect higher prices for many rare earths as demand continues to increase and supply becomes constrained, we also expect mining companies to benefit from these higher prices. And that's why we like mining companies when it comes to rare earths. Typically, you'll also see a very low overlap with REXC relative to other competing strategies. You could be looking at around 10-15% overlap. For a fund dedicated to rare earths exposure to have 10 to 15% overlap with other strategies marketing themselves as rare earths strategies, that speaks volumes about the fund's quality and what's in the index.

I'll also say that, as part of our relationship with Nasdaq, the index provider for this and most of our critical materials ETFs, Sprott can really lend its expertise in this area. We have decades of experience in this industry, and the indexes we have with Nasdaq are rebalanced twice a year. We go through about 1,000 mining companies twice a year. We are reviewing their financial statements, including management statements, to determine whether this is a pure-play company or has some pure-play exposure. 

This process happens twice a year and really sets this index series and this fund apart from other strategies. Just a little bit on the fund's characteristics: it has 41 issuers. This is a fund that, when we first started looking at our critical materials suite three years ago and expanded two years ago, we found wasn't suitable for its own ETF. And the reason for that was that there weren't enough issuers. The issuers that were out there had small market caps. Their liquidity was not good. We've seen significant growth in this industry over the last 18 months, with liquidity improving across many companies. Market caps have gone up cumulatively. 

The aggregate market cap of this index is now $51 billion. We see 41 issuers now. From a market-cap perspective, it's about 50% small-cap and 30% mid-cap. So you're going to have that smaller cap tilt to it. Being ex-China, about 95%-98% of our exposure in this fund is in Australia, the U.S., and Canada. Particularly with the markets we see now, our long-term view on these critical materials, rare earths, copper, uranium and similar critical materials we follow is that we have a very favorable long-term view. We always caution investors to adopt a long-term view and expect some short-term volatility.

If you're comfortable with the volatility, a targeted approach might be the way to go. We do see investors turn to the broader strategy, SETM, if they're looking for a little less volatility in one specific metal over another, while still providing meaningful rare-earth exposure. But that's just one thing I would note: be comfortable with some market volatility. Even though we've been mining these things for hundreds of years, thousands of years in copper's case, we still do see volatility from time to time. There's not much to show in terms of performance, as we launched in April. We've seen some of that volatility enter the market here in the last few months.

We started with a very strong performance, volatility hit, then flipped slightly negative, about 3.5% since inception. Still hanging in there very well. A lot of that goes to what we see from the core nature and the strategic use of rare earths. It's still performing very well amid very turbulent times. I mentioned SETM, but to flash up our product line up here before we hand it back over for Q&A. METL is a broad base. This is one of our actively managed funds: the Sprott Active Metals & Miners ETF. It also has some exposure to rare earths. To have an active approach to your critical materials exposure, we find investors are gravitating toward METL.

The portfolio management team in this fund has well over 50 years of experience in the metals and mining space. One of the PMs is actually an economic geologist, and his job is to go out and find these deposits and prove them out. This management team conducts up to 30 site visits and over 200 management team meetings a year. Very active in this space. Again, this is what they do. They do metals and mining. And in the bottom row, we also have our full line of critical materials ETFs. SETM is the passive version of METL. A little narrower in the metals it can have, but it is a rules-based approach.

Again, every single one of the Nasdaq-based indexes on this bottom row, which would be every fund except for URNM, we are involved in setting the eligible universe. Nasdaq then goes and applies the index rules to that. With that, Kirsten, I'll hand it back to you. I think we have a poll question to finish it out with before Q&A.

Kirsten Chang: Thanks so much, Steve. That was great. Do you plan on initiating a position in the Sprott Rare Earths ex-China (REXC) ETF within the next six months? And note, we will not share the results of this one on screen. So take your time. Yes, no, need more information, we're still doing research. Steve, we have a ton of great questions coming in, so let me get right to them. Phil's asking: how much impact would access to Greenland's rare earths actually have on the U.S.'s reliance on imports?

Steve Schoffstall: Anytime you start looking at one resource over another, you have to take into account where it's positioned in the globe. If you think of Greenland, it's an environment that's much different from what you might find in Australia, for example. It's a much more rugged and colder environment. It's hard to say exactly how much that would benefit the U.S. by reducing X percent, because rare earths are in such high demand worldwide. We don't control Greenland as much as some might like to think we do. But at the same time, anything that can be done to reduce the reliance on China will benefit the U.S. It's hard to put an exact number on it, and it'll also be factored in alongside other resources coming online. But it's important for many reasons.

Kirsten Chang: And now trying to stay away from politics, of course, but we have to discuss the impact of tariffs. Do any tariffs on China help move the needle on rare earth production, moving it back to the U.S. in your view?

Steve Schoffstall: I think this is having some of that impact. If you look at tariffs, and we can even broaden that out and say trade restrictions, for example, this latest round of export controls that China brought down on rare earths on 10 different U.S. companies was a result of some technology restrictions being placed on Chinese companies and what chips and technology could be sent over there. It is as intertwined with geopolitics as we might not want to talk about. That is a big part of why we see discussions about tariffs, trade restrictions and the like. In 

China, for many of these critical materials, including copper, where they control a large share of the market, is the one lever they know they can pull. And we see a lot of export restrictions now coming down to: you can have access to rare earths, but you can't use them in anything that benefits your defense industry. That's a non-starter for the U.S. and other governments. If anything, it's prompting governments to accelerate efforts to remove this material from China and source it directly.

Kirsten Chang: Question from Carl specifically about erbium. Any views on that? Risk of export controls or clear demand drivers that you may be hearing about?

Steve Schoffstall: I don’t have a strong view on erbium specifically. I will say anytime that we have a concentrated market where one or two countries have a lot of sway in the supply chain, there's always that risk. Even without supply chain issues, depending on where metals are mined, for example, we saw a lot of supply disruptions in copper last year, just given what we've seen from weather events and seismic activity. Anytime you have concentrated mine sites, regardless of the country, there's a risk of supply disruptions.

Kirsten Chang: They factor into fiber optics a bit if I'm not confused with something else. Don is asking, " Do you ever see futures contracts launching on any rare earths in the future?”

Steve Schoffstall: That's a good question. I think, to the extent you would, it would be financially backed, not physically backed, because it is a tight market. I don't know that these are metals that we would have sitting in storage in any great quantity. I would expect that, if we did have futures, it wouldn't be anytime soon. We've seen uranium futures launch, but there's not much activity in those trades. Not sure that rare earths futures are on the docket. That's just my first blush. I do not know if futures contracts are being planned.

Kirsten Chang: Another question from a metals enthusiast here, George asking about, do you have any view on scandium and the immediate applications beyond aerospace?

Steve Schoffstall: This is one of the metals that I thought we had on a slide. I'll double-check. But outside of aerospace, anytime that you need to have something that allows high stress travel, whether it's jet engines or anything like that, obviously, you see that in thrusters or you need lightweight material. That can be an area where we'll see significant growth. Scandium isn't something we follow. Mostly following a lot of the rare earths and critical materials, but good question.

Kirsten Chang: And another question from Phil, what about Russia? I would assume they have significant rare earth deposits as well. Is that the case?

Steve Schoffstall: Russia's one that gets lumped in a lot of times. They come in around 4%, putting them in the top six or seven. It's going to come down to cobbling together a supply chain. Brazil has about a quarter of the world's rare-earth resources. Brazil, Australia, India, the U.S., and Greenland are likely to be developed, and countries will look to source much of their supply from these areas. Maybe Russia gets back in the globe's good graces at some point, but that doesn't seem likely anytime soon.

Kirsten Chang: Speaking about volatility, you mentioned earlier, getting a lot of questions about that when you speak about REXC, but also SETM, the broader critical materials ETF. Could you speak a bit more about the short-term and long-term drivers of the price movements we've been seeing?

Steve Schoffstall: Long-term and just broadly speaking, what we see on a lot of these critical materials is that they have very favorable long-term supply-demand imbalances expected. We see it in uranium and copper. Copper was in a deficit last year, but it might be in a small surplus this year. Rare earths are an area where we're seeing supply issues. From our view on the critical materials, the long-term thesis holds very strongly. We're still seeing a lot of action on the investment side, with companies and countries making policy changes or investing directly. So, from that standpoint, things look very strong across many of these critical materials. 

The miners are equity companies; they can sometimes get caught up in broad-based market selling, regardless of what we're seeing in the overall critical materials outlook. We've seen this happen several times over the last couple of years across various metals, with them bouncing back. I think what you're seeing now is a lot of broad-based market selling, almost singularly focused on developments in Iran, inflation and interest rates. Those three factors are driving much of the market volatility. What we've seen from investors during past periods of volatility in critical materials is that they've used those periods as opportunities to initiate or add to new positions.

A great example of that is when we had a period about two years ago where uranium equities were underperforming, which followed a period when we would talk to advisors and say, "I really understand the uranium story. Prices are a little high. I'd love to have an opportunity to get in." If this is an area you've been waiting for, we see a pullback. I'll let everybody draw their own conclusion there, but pullbacks can be good investment opportunities if somebody has a long-term view, can accept volatility and is looking for a dollar-cost-averaging approach.

Kirsten Chang: All right, fantastic. I think we'll leave it there. That does it for today's webcast. It's not just about what you mine, but where you refine these materials. Steve, thanks so much for joining us today. Thank you to everyone here for attending and to those who submitted questions. We have a ton of those. If we are unable to reach them, someone from Sprott will personally get back to you.