Interest in hard assets as an investment opportunity has surged in recent years, thanks in large part to the introduction of several ETFs that allow investors easy access to a diversified basket of companies engaged in the extraction and production of various commodities. Funds investing in gold miners, silver miners, and lithium production have popped up, each attracting significant cash inflows from investors. Van Eck rolled out the latest innovation in this rapidly-expanding space on Thursday, launching the Rare Earth/Strategic Metals ETF (REMX). The new ETF will track the performance of the Market Vectors Rare Earth/Strategic Metals Index, a benchmark that includes companies engaged in a variety of activities related to mining, refining, and manufacturing rare earth metals.
Rare earth metals are industrial metals that are often mined as by-products in efforts focused on extracting precious metals such as gold or silver. Currently, there are about 49 elements on the periodic table considered strategic metals, a group of resources that have become the subject of increased attention thanks to their rarity and unique properties in a variety of industrial applications. Rare earths have been in the spotlight in recent months as the main producer of the metals, China, has implemented a reduction in its export quota and has reportedly considered plans to halt all exports of the group in order to develop home-grown industries. This decision by the Chinese government has created extra pressure on the already overstretched market and has put many high tech, military, and green energy firms on notice [also see The Definitive Guide To Clean Energy ETFs].
With upwards of 95% of rare earth production controlled by China, even a partial ban on exports could have a major impact on a variety of global industries. Rare earth metals are key ingredients in a wide range of products, including jet engines, advanced weapons, hybrid cars, wind turbines, and flat-screen televisions. While these elements are critical to modern life, sources of rare earth and strategic metals are vulnerable–making for a unique investment opportunity that many believe holds significant long-term potential.
Demand for rare earth metals has increased considerably in recent years, while supplies have remained relatively stable. Significant barriers to entry exist in the rare earth metals space, as the extraction of these elements requires not only significant capital expenditures but advanced technological expertise as well. Moreover, an increased focus on environmental legislation serves as a potential obstacle to increased production of rare earth metals.
Under The Hood Of REMX
The fund plans to charge an expense ratio of 57 basis points and the benchmark index will be comprised of foreign and domestic equity securities of publicly traded companies primarily engaged in a variety of activities that are related to the producing, refining and recycling of rare earth and strategic metals and minerals. Pure play rare earth metals tend to be small and mid-sized firms, as reflected in the composition of REMX. There is no allocation to large caps, with mid caps (46%) and small and micro caps (54%) accounting for all underlying holdings. The entire market cap of the underlying index totals just $25 billion, highlighting the exposure to smaller companies offered by REMX [read Are Physically-Backed Industrial Metal ETFs On The Horizon?].
While REMX includes companies engaged in the extraction of more than four dozen rare earth and strategic metals, the heaviest concentrations are in rare earth elements, a group that includes scandium, yttrium, and the fifteen lanthanides. REMX will also focus in on companies engaged in titanium extraction and production. Also known as the “space age metal,” titanium can be alloyed with a number of more common elements for use in aerospace and military applications.
The Rare Earth/Strategic Metals Index is a rules based, modified capitalization weighted, float adjusted index. Individual components of the index will be capped at 8%, an important restriction since stocks in the rare earth metals industry can exhibit huge price swings over relatively short time periods. As of October 11, 2010, the Rare Earth/Strategic Metals Index included 24 securities of companies with a market capitalization range of between approximately $157 million and $370 billion and an average market capitalization of $1.2 billion. Some of the top components of the index are Australian firms Lynas Corp (8.8%), Iluka Resources (8.3%), and American-listed Titanium Metals (6.7%). In terms of country exposure, Australia, Canada, the United States, and China all account for at least 15% of the fund with Australian firms leading the way making up 24% of the index. Though China is the leader in extraction of the raw materials, the bulk of the refining and manufacturing occurs elsewhere in the world, explaining the relatively minor allocation (about 15%) to China [see the new ETF Country Exposure Tool].
REMX becomes the 23rd ETF in the Commodity Producers Equities ETFdb Category, joining a number of other funds that offer exposure to companies engaged in the extraction and production of various commodities. In addition to a number of funds focusing on precious metals (GDX and SIL), this group includes ETFs focusing on steel, timber, copper miners, and agribusiness. REMX’s debut comes shortly after the launch of the Lithium ETF (LIT) from Global X. Lithium is a strategic metal that is a critical component of green technologies, mobile phones, and military applications. According to Van Eck, lithium accounts for about 2% of the exposure of REMX.
Despite being relatively young, LIT has been a huge hit with investors; the fund has over $70 million in assets and trades close to a quarter million shares a day roughly 90 days after inception. If REMX is able to garner the same level of support that LIT has been able to, look for the new fund to be another big hit from Van Eck [also read Global X Lithium ETF Hits The Market]
Disclosure: Eric is long LIT.