Artificial intelligence (AI), cloud computing, and machine learning are just a few of the obvious tech innovations dominating the majority of investor attention spans these days. Along with the companies focused on these technologies, attention also diverts to those integral to meeting hardware demands, like semiconductor firms. And then there’s a base layer that underpins these technological buildouts — the need for natural resources.
The buildout of data centers for AI and cloud computing will require the use of base metals to create the hardware like aluminum and steel. Furthermore, the copious amounts of electricity used to power these applications will require metals with strong electrical conductivity properties like copper and silver.
The need for these natural resources is not just isolated to disruptive technologies like AI. Critical elements are necessary for the manufacturing of everyday tech devices like monitors and mobile phones. They are also crucial to the development of defense technologies like drones, lasers, and guidance systems.
Realizing their importance, the White House is already investing in companies aimed at natural resource elements like critical minerals. This includes an investment stake in companies like MP Materials, Intel, Lithium Americas, and Trilogy Metals.
Limited Supply Meets Voracious Demand
The demand for natural resources — set to rise in the long-term horizon — has the potential to cause a supply imbalance. This unprecedented demand could lead to disrupted supply chains as noted by the World Economic Forum’s Global Risks Report 2024.
“Global natural resource consumption is predicted to increase by 60% by 2060, compared with 2020 levels,” the World Economic Forum noted, citing a 2024 United Nations Environment Programme’s Global Resources Outlook report.
This voracious demand for natural resources presents a compelling investment case for companies poised to capture this growth opportunity.
Invest in What Comes Naturally With ETFs
ETFs offer the easiest path for exposure to natural resources. They create investing opportunities in natural resources companies, with the ease of a flexible, cost-efficient, and tax-advantaged wrapper. Ideal funds for exposure include the ALPS CoreCommodity Natural Resources ETF (CCNR ), which was discussed in a webinar regarding underinvestment in natural resources. Others include the iShares North American Natural Resources ETF (IGE ), SPDR S&P North American Natural Resources ETF (NANR ) and the FlexShares Morningstar Global Upstream Natural Resource Index Fund (GUNR ).
Investing in commodities can present nuanced challenges. Thus, tapping into the expertise of a portfolio manager can be an ideal way to navigate the natural resources space. That said, some investors may want that higher degree of flexibility in an active ETF like the Xtrackers RREEF Global Natural Resources ETF (NRES ).
Mining for critical minerals plays a key role in creating the infrastructure for technological innovation. As such, investors may want to consider the Sprott Critical Materials ETF (SETM ). The fund tracks the Nasdaq Sprott Critical Materials Index. That index includes global constituents poised to capture growth in the energy transition materials industry.
“Critical minerals are essential for a range of today’s energy technologies and for the broader economy,” the International Energy Agency (IEA) said. “For example, lithium, nickel, cobalt, manganese and graphite are crucial to battery performance.”
Lithium Leading the Charge
As mentioned by the IEA, the list of critical minerals includes lithium — an essential component of rechargeable batteries. It’s crucial for the development of electric vehicles (EVs), mobile devices, and other applications where rechargeable energy sources are a must.
Plus, in battery management systems for AI data centers, lithium supports the monitoring of parameters like voltage, temperature, and state of charge. Precedence Research forecasted that the data center lithium-ion battery market could reach almost $18 billion in less than 10 years.
Given this tremendous growth prospect, ETFs again offer an easy ingress for exposure. This creates opportunities in funds like the Amplify Lithium & Battery Technology ETF (BATT ). By way of the EQM Lithium & Battery Technology Index, BATT invests in companies that derive a significant portion of their revenue from battery storage solutions, battery metals/materials, and EVs. Other ETFs to consider include the Global X Lithium & Battery Tech ETF (LIT ), iShares Lithium Miners and Producers ETF (ILIT ), and the Sprott Lithium Miners ETF (LITP ).
VettaFi LLC (“VettaFi”) is the index provider for BATT, for which it receives an index licensing fee. However, BATT is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of BATT.
Originally published by Advisor Perspectives.
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