⚗️ Upstream Materials

Before a chip can power an AI server or an EV can hit the road, raw materials must be mined, refined, and processed. The upstream materials trade captures this foundational layer of the semiconductor and electrification value chains. When chip demand surges, so does demand for the materials that make chips — and the batteries that power the devices chips go into.

Why materials matter for semiconductor traders

Semiconductors don’t exist in isolation. They require:

• Rare earth elements: Used in magnets, displays, and electronics manufacturing
• Strategic metals: Gallium, germanium, tungsten — critical for chip production
• Lithium: Powers the batteries in every device semiconductors enable (EVs, phones, data center backup)
• Silicon: The foundational semiconductor material (though no pure-play ETF exists)

The connection is direct: semiconductor demand drives materials demand. When NVIDIA sells more GPUs, more rare earths and lithium are consumed downstream.

The investment thesis

Correlated Demand

When the semiconductor cycle accelerates, materials demand follows — often with a lag.

Supply Constraints

Unlike software or even chip manufacturing, materials supply is geologically constrained:

• Rare earth mining: Dominated by China (~60% of production, ~90% of processing)
• Lithium extraction: Concentrated in Australia, Chile, and China
• Long lead times: New mines take 5-10+ years to develop

Supply inelasticity means price spikes when demand surges.

Geopolitical Risk Premium

Materials have become a national security concern:

• China’s dominance in rare earth processing creates supply chain risk
• Western nations investing in domestic/allied supply (US, Australia, Canada)
• Export restrictions and trade tensions can spike prices overnight

This geopolitical dimension adds volatility — and opportunity.

Rare Earth & Strategic Metals ETFs

REMX — The Core Rare Earth ETF

What REMX holds:

• Rare earth miners (MP Materials, Lynas Rare Earths)
• Strategic metals companies (lithium, tungsten, cobalt exposure)
• Global exposure (Australia, China, US, Canada)

Key characteristics:

• High volatility: Small-cap miners in a niche sector
• China exposure: Some holdings have China operations/customers
• Pure-play: The only major rare earth-focused ETF

What are rare earths and strategic metals?

Despite the name, rare earths aren’t actually rare — they’re difficult to extract and process:

The “rare” in rare earths refers to the processing difficulty, not geological scarcity.

Why rare earths matter for semiconductors

• Gallium: Critical for compound semiconductors (5G, LEDs, power electronics)
• Germanium: Used in fiber optics and infrared optics
• Neodymium magnets: Found in hard drives, speakers, EV motors
• Displays: Rare earths enable the colors in LED and OLED screens

When China restricted gallium and germanium exports in 2023, it sent shockwaves through the semiconductor industry.

Lithium & Battery ETFs

Lithium sits at the intersection of semiconductors and electrification. Every device that uses a chip also needs power — and increasingly, that power comes from lithium-ion batteries.

Key Lithium/Battery ETFs

LIT holds the full lithium value chain — miners (Albemarle, SQM), battery manufacturers (CATL, Panasonic), and integrated EV/battery players. BATT offers broader battery ecosystem exposure with lower expenses but less liquidity.

Both have significant China exposure through battery manufacturers (CATL, BYD).

How do materials relate to semiconductors?

The Demand Chain

  flowchart TD
    A[**Semiconductor Demand**<br/>AI, EVs, IoT] --> B[**Device Manufacturing**<br/>servers, cars, phones]
    B --> C[**Battery Demand**<br/>power the devices]
    C --> D[**Materials Demand**<br/>lithium, rare earths]

Materials lag semiconductors — when NVIDIA announces a new GPU architecture, the materials impact takes quarters to flow through.

Key Ratios to Monitor

Signal Interpretation

Cycle dynamics

Early Semiconductor Cycle

• SMH leads, materials lag
• REMX/SMH and LIT/SMH falling
• Materials companies see orders before revenue

Mid-Cycle

• Materials start catching up
• REMX/SMH stabilizing or rising
• Lithium and rare earth prices firming
• Analyst upgrades for materials companies

Late Cycle

• Materials may spike on supply constraints
• REMX/SMH at highs
• Watch for inventory building
• New mining capacity announcements (future supply)

Risks and considerations

Volatility

Materials ETFs are significantly more volatile than broad market ETFs:

China Risk

Both rare earths and lithium have significant China exposure:

• REMX: Some holdings have China operations
• LIT: Major battery manufacturers are Chinese (CATL, BYD)

Trade tensions, export restrictions, or regulatory changes can move these ETFs sharply.

Commodity Cycles

Unlike semiconductors (which benefit from secular growth), materials are cyclical:

• Lithium prices crashed 80%+ in 2023-2024 after the 2022 spike
• Rare earth prices are volatile based on China policy
• New supply can crater prices (lithium mine expansions)

Position sizing should reflect this cyclicality.

When to use materials ETFs

Scenarios Favoring Materials

Scenarios Avoiding Materials

Quick reference

Related themes

Sources