Strategic Metal ETFs Head-To-Head: REMX vs. LIT

by on December 14, 2010

Over the past year, interest in commodities has skyrocketed as countless commodities from gold to wheat have surged to fresh highs. This trend has put renewed focus on not only physically-backed commodity ETFs, but commodity producing equities as well. At last count, there were 25 ETFs in the Commodity Producers ETFdb Category, with five funds eclipsing the $1 billion AUM mark. While the most popular funds focusing on stocks of commodity producers tend to be either broad-based–such as MOO or IGE–or focusing on the massive gold and silver mining industry (such as GDX and GDXJ), there are a number of products offering exposure to companies engaged in the extraction and production of more specialized natural resources.

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 come common price drivers–and very different in others [see New ETFs Grow Up Fast].

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 Boliva–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 [see What Every Investor Needs To Know About Commodity ETF Investing].

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 and Rio Tintos 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 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 [see fundamentals of REMX here].

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 [see Three ETFs To Play The Coming Energy Storage Boom].

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. The fund invests 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 [see holdings of LIT here].

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 is offers exposure to a broad swath of the supply chain, thanks to its focus on both mining firms and lithium ion battery producers [see all of the Commodity Producer Equities here].

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Disclosure: Eric is long LIT.