ETF Database
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Commodity Producers ETFdb Category
Thanks to continued proliferation of ETFs, investors have more
options than ever before when it comes to segmenting market
exposure among very specific niches, such as the increasingly
popular strategic metals space. The early success of two
recently-launched ETFs in this space, the Market Vectors Rare
Earth/Strategic Metals ETF (
REMX
) and the Global X Lithium ETF (
LIT
), highlight the tremendous investors interest in this somewhat
exotic corner of the commodity market. These two funds are similar
in many ways-there are some common price drivers-and very different
in others.
Although most investors could not spot lithium or molybdenum out
of a metals lineup, many have begun to recognize the importance of
these resources to the global economy. The commodities mined by
these two funds are often heavily concentrated in a few regions of
the world; the vast majority of rare earth deposits are located in
China, while South America-specifically Chile and Bolivia-have some
of the largest lithium deposits in the world. This significant
geographic concentration is a component of the investment thesis
behind both of these industries, as the end products derived from
these elements help to power not only our cell phones and electric
cars, but also find their way into several military applications
and high tech consumer goods as well.
For investors looking to establish exposure to industries
expected to see strategic importance skyrocket in coming years,
both lithium and strategic metals may be interesting options.
Below, we highlight the ETFs offering exposure to these markets,
touching on some similarities and differences in the risk and
return profiles.
Index & Holdings
REMX tracks the Market Vectors Rare Earth/Strategic Metals
Index, a rules based, modified cap-weighted benchmark that includes
publicly traded companies primarily engaged in a variety of
activities that are related to the mining, refining and
manufacturing of rare earth/strategic metals. Rare earth/strategic
metals are industrial metals that are
typically mined
as by-products in operations focused on precious metals and base
metals. Compared to other metals, they have more specialized uses
and are often more difficult to extract, which translates into
relatively scarce supplies. Currently, approximately 49 elements in
the periodic table fall under the "rare earth/strategic metals"
umbrella, including cerium, manganese, titanium and tungsten.
Strategic metals are used in a variety of technologies including
jet engines, hybrid cars, steel alloys, wind turbines, flat screen
televisions and cellular phones. Rare earth metals, a subset of
strategic metals, are a collection of 17 chemical elements that are
essential in many of today's most advanced technologies, with
particular applications in electronics.
In terms of country exposure, REMX has a focus on small miners
in both Australia and Canada; the top two spots go to miners listed
in Australia while the next two are Canadian mining firms. As a
result, the fund's top country allocations consist of Australia
(23.9%) and Canada (19.8%), followed by the U.S. (18.8%) and China
(14.8%). It should be noted, however, that many of these companies
maintain significant operations outside of the country where they
are listed. Due to the focus of these mining companies, many of
them are much smaller than the BHP Billitons (
BHP
) and Rio Tintos (
RIO
) of the world; more than half of the fund's assets go towards
companies that have a market cap of less than $1 billion.
Investors should also note that based on the fund's top
holdings, exposure is tilted towards producers of titanium and
molybdenum; five of the top ten holdings engage in titanium mining
while two mine for molybdenum. Interestingly, the fund also offers
some exposure to lithium miners as well, suggesting that there may
be some overlap between REMX and LIT. The fund from Van Eck might
not have a long history, but it has been popular among investors.
Assets currently stand at close to $150 million, thanks in part
perhaps to a relatively low expense ratio of 57 basis points.
LIT tracks the Solactive Global Lithium Index, a global
benchmark comprised of companies that are primarily engaged in some
aspect of the lithium industry such as lithium mining, exploration
and lithium-ion battery production. Lithium has a variety of
applications, and is used widely in pharma, ceramics, aluminum, and
a number of clean technology processes. Lithium is one of the
lightest metals and can store three times the energy of competing
materials, which makes it the most attractive battery material
according to the U.S. Geological Survey indicates. It can be
charged and discharged hundreds of cycles without substantial
degradation, loses very little charge while idle, and has no memory
effects. Moreover, lithium is environmentally friendly compared to
existing nickel-metal hydride or lead-acid battery technologies, a
major driver of widespread use in batteries for hybrid and electric
cars.
For LIT's individual holdings, Chilean giant [[SQM]]
dominates-taking up about one-fifth of the total assets-and is
closely followed by American lithium manufacturer FMC Corp. (
FMC
). The fund has about 25 holdings in total, with the U.S. and Chile
accounting for a big portion of total assets. It's also worth
noting that LIT is split right down the middle in terms of
allocations to mining firms and lithium battery manufacturers, a
methodology that ensures exposure to various sections of the value
chain-from when the metal is pulled out of the ground through final
manufacturing and sale. LIT charges an expense ratio of 75 basis
points, and currently has volume approaching a quarter-million
shares.
Room For Both?
Both rare earth metals and lithium are likely to be critical
components of a variety of 21st century technologies. Both funds
could be appealing to investors looking to gain access to risky but
promising markets that are generally overlooked by more broad-based
domestic and international equity funds. REMX may have more appeal
for investors looking for broad exposure to the entire rare
earth/strategic metal market, and for those who believe that
China's near-monopoly on the space could create opportunities
related to scarcity in coming years. LIT, on the other hand, may
have appeal as a way to play a cleantech boom and gain exposure to
companies engaged in one of the most crucial aspects of alternative
fuel technologies. The Global X fund is also unique in that it
offers exposure to a broad swath of the supply chain, thanks to its
focus on both mining firms and lithium ion battery producers.
Disclosure:
Author is long LIT.
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