Rare-earth ETFs experienced a sharp decline on Tuesday after posting explosive gains the previous week. Both single-stock and diversified rare-earth ETFs retreated alongside a steep drop in shares of USA Rare Earth Inc., highlighting the risks of trading geopolitics through high-octane ETF products. Leveraged ETFs tied to USAR saw significant losses, mirroring the decline in USAR shares.

Last week, USAR surged due to a major federal commitment, with the U.S. government announcing plans for funding and loans. The Department of Commerce will receive shares in the company, aiming to strengthen domestic supply chains and reduce reliance on China. USA Rare Earth plans to begin mining operations in West Texas by 2028.

Investors are reassessing near-term expectations for USAR as the company continues to face operating losses and negative cash flow. Production is still a couple of years away, which may have dampened initial enthusiasm. The VanEck Rare Earth and Strategic Metals ETF, which offers global exposure, also traded lower, highlighting the volatility in this space.

The rapid swing from surge to selloff in rare-earth ETFs illustrates a divide in the market. Leveraged ETFs are used for short-term trading based on policy headlines, while diversified funds offer a longer-term view on supply-chain shifts. As Washington focuses on rare earths in its industrial strategy, ETFs will likely remain the preferred vehicle for trading in this sector.

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