The Geopolitical Hedge Investors Overlook: Rare Earths

When China restricted exports of gallium and germanium in 2023, markets were reminded that supply chains can be disrupted. These metals may not be household names, but they are critical to semiconductors, defense systems, and renewable energy, which is why the restrictions drew immediate market attention.

Investors are again turning to supply chain resilience as a portfolio concern. Rare earth elements sit in the same category as gallium and germanium. Embedded in electric vehicles, advanced weaponry, and clean energy infrastructure, rare earth elements represent one of the few asset themes where geopolitics directly drives market outcomes.

That reality was underscored in July, when the United States backed MP Materials, its only active rare earth miner, with a multibillion-dollar package including equity, loans, and a 10-year price floor on neodymium and praseodymium. The deal, discussed further in Winston Ma’s Enterprising Investor analysis of a potential US sovereign wealth fund, shows how policy is moving from rhetoric to concrete capital commitments.

For investors, the right question isn’t whether rare earths can “beat the market.” It’s whether they can provide diversification and resilience in moments when traditional portfolios are vulnerable.

A Portfolio Framing: Rare Earths as a Stress Hedge

To evaluate this, I built a Maximum Sharpe Ratio portfolio using five ETFs:

• REMX – Rare Earth & Strategic Metals
• LIT – Lithium & Battery Technology
• ITA – Aerospace & Defense
• GLD – Gold (geopolitical hedge)
• IEF – U.S. Treasuries (defensive anchor)

The goal was not to design a market-beating strategy, but to evaluate whether rare earth exposures add portfolio resilience. I used monthly returns from January 2018 to July 2025, a 36‑month rolling covariance matrix, and quarterly rebalancing. The results:

• Annualized Return: 11.45% vs. 14.53% (S&P 500)
• Volatility: 21.95% vs. 17.19%
• Sharpe Ratio: 0.43 vs. 0.73

If judged solely on Sharpe ratio, the portfolio underperformed broad equities. But this misses the real point: rare earths tend to outperform during geopolitical shocks and supply chain disruptions, precisely when traditional portfolios are most at risk.

For investors, the practical takeaway is to test rare earths alongside other diversifiers, such as commodities, infrastructure, or defense equities, in a satellite sleeve.

When Rare Earths Shine

Looking at recent episodes of stress and transition highlights how rare earths can function as a hedge when traditional portfolios stumble.

• 2019 United States–China Trade Dispute: During the 2019 tariff standoff, rare earth and defense ETFs advanced even as the S&P stumbled. This divergence highlighted their value as a hedge against policy-driven supply chain risks.
• 2020–2021 EV Adoption Rally: As electric vehicle demand accelerated, lithium and rare earth exposures surged ahead of the market. For investors, this underscores their potential to capture secular growth trends while adding diversification.
• 2023 Export Controls: When China restricted exports of gallium and germanium, rare earth themes drew renewed attention and outperformed. The episode showed how policy shocks can create “thematic alpha” precisely when traditional markets are vulnerable.

These bursts illustrate the real value: rare earths function as a shock absorber. They won’t replace equities, but they can provide a counterweight when macro risks flare.

Figure 1.

Practical Applications

• Thematic Diversification: Use rare earths as a satellite allocation that complements big secular themes: electrification, defense modernization, and the clean energy transition. These exposures can give portfolios targeted access to structural growth trends.
• Geopolitical Risk Premium: Recognize that policy shocks, not just market cycles, can drive returns. Export bans, tariffs, and supply disruptions often move rare earth markets independently of equities, giving investors a rare source of true diversification.
• Portfolio Construction:  Test rare earths as a 5% to 10% sleeve within a diversified portfolio. Pair them with gold and Treasuries to balance risk. The goal isn’t to outperform equities, but to add resilience when equities are stressed.

Key Takeaways

• Rare earths are not a silver bullet, but they are a geopolitical hedge that investors can’t ignore.
• Traditional risk metrics (Sharpe ratio) understate their value: non-correlation and tail events.
• For allocators, the right framing is resilience, not return chasing.
• In a world where supply chains are vulnerable, rare earths are more than a commodity story. They are a portfolio strategy for managing geopolitical risk.

The author declares no conflicts of interest. This article is based on publicly available ETF pricing data (2018 to 2025). It does not constitute investment advice and is intended solely for educational purposes.