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EU to secure the critical mineral supply chains and to power the energy transition

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The global race to secure critical minerals is continuing as the European Union (EU) ramps up its efforts to do just that. In effect, this should provide more growth prospects for ETFs that focus on critical minerals investments.

Rather than rely on certain countries such as China, the EU is looking to shore up its own critical minerals supply chain amid a global transition to alternative energy sources.

“European lawmakers are accelerating efforts to secure the critical mineral supply chains essential to powering the energy transition and high-tech defense, reflective of a broader awakening overtaking Europe as governments rush to de-risk ties with China amid fears of strategic vulnerabilities,” a Foreign Policy article said.

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That acceleration has been rapidly increasing the past few years, especially when it comes to the EU weaning itself from heavy reliance on China. In response, the EU has been partnering with other nations to form key partnerships with those that are abundant with critical minerals supply.

“The thinking has been there for well over a decade that Europe needs to do something about these dependencies on critical minerals,” said Luke Patey, a senior researcher at the Danish Institute for International Studies, per the Foreign Policy article reference. “But it’s only been in the last few years that policy language has been formulated on what to do.”

Capture Critical Minerals Growth

For investors who are looking for opportunities in critical minerals for long-term growth or even traders eyeing short-term profit opportunities, individual stocks that can capitalize on critical minerals is an option. However, getting exposure to one ETF that captures this opportunity is an easier solution.

A pure-play critical minerals fund worth considering is the Sprott Energy Transition Materials ETF (SETM). The fund seeks to provide results that correspond to the total return performance of the Nasdaq Sprott Energy Transition Materials Index. That index essentially tracks the performance of a selection of global securities in the energy transition materials industry.

It’s no secret that the overall demand for these minerals is projected to rise. With it, the demand for miners who materially affect the global supply will also increase, and SETM provides investors access to miners producing key critical minerals like lithium for electric vehicles (EVs).

For global exposure, the fund offers deep diversification when it comes to country exposure as well as market capitalization. Canada, the United States, and Australia round out its top three country allocations. The fund spreads its assets over large-, mid-, and small-cap companies to offer a balanced market-cap blend.

In the past week, the price of physical gold has continued to rise. According to Kitco, on October 16, 2023, the price of gold was valued at around $1,922 an ounce, and it began Monday morning just above $1,970. This is a feat worth noting as the precious metal saw a continuous drop in its price for close to six months this year prior to its jump throughout the month of October.

Gold’s Rally

As gold’s increase in price continues to see a swing in a positive direction, so do some of the ETFs that track the precious metal and companies that mine for it. Using data from LOGICLY, we are able to take a look at some of the funds that returned the highest amount in the past week. There are three ETFs that take different angles on the precious metal within the top 10.

Sprott currently issues two of the three gold-related funds on that list. The Sprott Gold Miners ETF (SGDM) has returned 2.81% in the past week, which is the highest among the three gold funds, and fourth on the list overall. Meanwhile, the Sprott Junior Gold Miners ETF (SGDJ) has posted a 2.07% return, giving it the ninth spot in the top-highest-returning funds in the past week, according to LOGICLY.

In this article, we break down several of the key features of the two Sprott gold funds that have benefited from gold’s price rally.

Sprott Gold Miners ETF (SGDM)

SGDM has been around for a little less than 10 years, with an inception date of July 15, 2014. It currently has $257 million in assets and an expense ratio of 0.50%. The fund tracks the Sprott Zacks Gold Miners Index. This index gives investors exposure to large-cap companies within the gold industry. SGDM provides exposure to three economies, with Canada representing more than 85% of its portfolio. It also offers exposure to gold mining companies in the U.S. and South Africa.

Looking beyond last week, it has a nearly 9% return for the 30-day period. In the last 12 months, it returned 24.03%, and over the last four years, it posted a return of 3.19%.

Sprott Junior Gold Miners ETF (SGDJ

SGDJ has an inception date of March 31, 2015, making it slightly younger than SGDM. The fund has $100 million in AUM and an expense ratio of 0.50%. It gives investors exposure to small-cap companies within the gold mining space by tracking the Sprott Zacks Junior Gold Miners Index. The fund also provides exposure to five different countries. Its heaviest-weighted country is Australia, accounting for 50% of its portfolio. SGDJ also covers equities in Canada (31.16%), the United States of America (9.30%), the United Kingdom (9.01%), and Indonesia (0.53%).

Regarding short-term performance, SGDJ has had a successful October, posting a 7.82% return. In the past year, it has slightly outperformed SGDM, with a 25.79% return. However, it has underperformed SGDM during all other time frames.

If the price of gold continues to rally in the uncertain economic environment, and ETFs that track companies that mine the precious metal exhibit sustainable growth, investors may renew their interest in gold mining equities. Both funds have had negative outflows year to date, but that trend could reverse.


Source: ETF Trends

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