Global X announced the latest addition to its ETF product lineup today, rolling out a fund designed to offer investors exposure to one of the world’s most important metals. The Global X Lithium ETF (LIT) will seek to replicate the Solactive Global Lithium Index, a benchmark designed to reflect the performance of companies across the globe that are primarily engaged in any part of the lithium industry including; mining, exploration, and lithium-ion battery production. “The Global X Lithium ETF is an efficient way to invest in what we refer to as a “green” commodity because of its direct correlation to the renewable energy market such as electric cars and energy storage,” said Bruno del Ama, CEO of Global X Funds [see our recent interview with Bruno].
This new addition of LIT continues the trend of the booming commodity producer ETF segment. As investors have looked for other ways to achieve commodity exposure beyond more traditional strategies such as with physically backed funds like GLD or futures-based strategies such as UNG– instead, investors have embraced a form of “indirect” commodity exposure in the form of equities.
LIT joins about 20 other ETFs in the Commodity Producer Equities ETFdb Category that offer investors a way to establish exposure to prices of commodities through stocks of companies engaged in their discovery, extraction, refining, and sale. That list of ETFs includes both broad-based funds (such as HAP) as well as more targeted ETFs focusing on miners of gold (GDX, GDXJ), silver (SIL), copper (COPX), and platinum (PLTM). As this sector continues to expand, investors are gaining access to more commodities that might not lend themselves to a physical replication strategy or a futures-based fund [also see Mining ETFs: Ready To Rally?].
All About Lithium
Most investors know next-to-nothing about lithium, especially compared to its sexier precious metal cousins or more ubiquitous elements such as aluminum or copper. But lithium is one of the most important natural resources in the world, with a wide range of applications that range from cell phones to aircraft parts and from nuclear weapons to medical applications.
Many analysts anticipate the demand for lithium will skyrocket in coming years as new technologies advance and become more widely adopted. Perhaps lithium’s most important use in the not-so-distant future will be in next generation battery technology. “Lithium is the lightest metal” said Jose C. Gonzalez, COO of Global X Funds, in a press release. “When processed it has the capacity to store electric energy more efficiently than any other material. Efficient electric energy storage is necessary for all green energy products and the computer systems that control them – like electric cars, solar, wind and water power.”
Most consumers already use lithium batteries in a variety of everyday products such as wristwatches and portable consumer electronics. But the potential game-changer for lithium demand is the rechargeable lithium-ion battery. These products are already used in many consumer electronics such as laptops and cell phones due to the high energy to weight ratios; over 90% of laptops use the technology and just over 60% of cell phones are lithium-ion powered. These batteries are gaining traction as a power source for cars, planes, and military vehicles, which could propel demand for the metal to new heights. Within the auto industry, the Chevy Volt will be powered by a lithium-ion battery pack, and the Tesla Roadster, Chyrsler EcoVoyager, Dodge ZEO, Jeep Renegade and the Saturn Flextreme are all slated for “li-ion” batteries as well. BMW plans to launch its remodeled Li-ion battery-powered 750i luxury sedan to the Japanese in 2010 ensuring that even the high-end market becomes exposed to lithium.
The lithium industry is still developing, and new discoveries are still being made. Currently, Chile’s Sociedad Quimica y Minera (SQM) produces the majority of the world’s supply, but Bolivia and Afghanistan are believed to have significant reserves as well. Afghanistan is the wild card in that equation; a recent discovery made by Pentagon officials and U.S. geologists indicates that the country is home to nearly $1 trillion in untapped mineral deposits. One government official predicted that Afghanistan would eventually become the “Saudi Arabia of lithium,” but the country’s mining infrastructure is in shambles and it will likely be years before companies develop the ability to tap into these massive resources [also see Afghanistan: The Next Frontier For Mining ETFs?]. Unfortunately for investors, Afghanistan and Bolivia aren’t exactly at the top of the list of most investor-friendly countries, forcing investors to consider high levels of political risk in order to invest in some of the most lucrative markets. Before today, most investors would buy a few select lithium mining companies and hope for the best in terms of political repercussions. Now thanks to the new ETF, investors can put their money in the broad sector and not worry as much about one or two securities sabotaging their total returns.
Possibly due to these risks and the ever increasing demand for the metal, lithium prices have tripled since 1999, and many large investors have been eagerly looking for ways to invest in the lithium market more efficiently and with lower overall levels of political risk. Hedge fund MC Capital Partners partnered with Global X to create the new ETF after spotting a need in the market for such a product. “The highly reactive metal isn’t traded on any commodity exchange,” writes Carolyn Cui. “Companies producing lithium are either multinationals where lithium accounts for only a small portion of their businesses or nascent miners where production still is years away.”
According to the fund’s fact sheet, the top index constituents include Chilean giant SQM (20%), FMC corp (17%), and Rockwood Holdings (7%) which is a major lithium compound producer. In terms of country exposure, the U.S. makes up roughly half of the individual country allocation while Chile receives the second spot due to SQM, and Japan is in third with 10%. Currently, the fund looks to be evenly broken down among lithium mining and lithium battery producers but this could change in between the fund’s semi-annual readjustments. The index holds 20 securities in total and the fund charges an expense ratio of 0.75%.
Disclosure: No positions at time of writing.