Rare-earth ETFs flipped sharply lower on Tuesday, underscoring how quickly policy-driven trades can unwind, especially when leverage is involved. After explosive gains last week, both single-stock and diversified rare-earth ETFs retreated alongside a steep drop in shares of USA Rare Earth Inc. (NASDAQ:USAR), highlighting the risks of trading geopolitics through high-octane ETF products.
Leveraged ETFs Swing From Surge To Slide
The sharpest moves once again came from leveraged ETFs tied to USAR. After jumping nearly 65% last week, the Leverage Shares 2X Long USAR Daily ETF (NASDAQ:USGG) and the Tradr 2X Long USAR Daily ETF (BATS:USAX) were both deeply in the red on Tuesday with around 30% declines, mirroring a roughly 15% decline in USAR shares.
These ETFs are designed to deliver twice the daily return of the underlying stock, a structure that magnifies losses just as aggressively as gains. As momentum faded following last week’s rally, the downside move accelerated, reinforcing their role as short-term trading tools rather than long-term exposure vehicles.
Policy Catalyst Meets Reality Check
Last week’s surge in USAR was fueled by a major federal commitment to USA Rare Earth. The U.S. government announced its plans for a $277 million in direct funding and a $1.3 billion loan, while the Department of Commerce will receive 16 million shares in the company. The deal, closed on Jan. 29, is aimed at strengthening domestic supply chains and reducing reliance on China, the world’s dominant producer of rare earths.
Secretary of Commerce Howard Lutnick said the investment would help ensure U.S. mineral independence, framing rare earths as a national security priority. USA Rare Earth, which operates a manufacturing facility in Stillwater, plans to begin mining operations in West Texas by 2028, targeting production of up to 40,000 tons of rare-earth materials per day.
Still, the selloff suggests investors are reassessing near-term expectations. The company continues to face operating losses and negative cash flow, and production remains at least a couple of years away. These factors may have resurfaced as the initial policy-driven enthusiasm cooled.
Diversified Rare-Earth ETFs Also Pull Back
The reversal was not limited to leveraged products. The VanEck Rare Earth and Strategic Metals ETF (NYSE:REMX), which offers diversified global exposure to rare-earth and strategic metals producers, also traded lower by more than 4% on Thursday, at last check, though with less dramatic swings than its leveraged counterparts.
REMX gained more than 120% last year and remains up roughly 20% year-to-date, but the pullback highlights how even diversified ETFs are not immune to sentiment shifts in this volatile space.
Leverage Cuts Both Ways
The rapid swing from surge to selloff illustrates a growing divide within the rare-earth ETF universe. Leveraged ETFs are increasingly used to trade policy headlines and geopolitical momentum, while diversified funds offer a longer-term way to express views on supply-chain shift.
As Washington keeps rare earths at the center of its industrial strategy, ETFs will likely remain the market’s preferred vehicle, but recent moves show that, with leverage, the ride can be just as fast on the way down.
Photo: Shutterstock
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