Van Eck launched a new ETF seeking to capitalize on the headlines surrounding concerns over a controversial China quota restriction (embargo) on Rare Earth metals out of China. There are several such metals that are needed for high tech industries and applications ranging from weaponry to GPS systems and without these metals, both technological and military progress and supply could be brought to a screeching halt. While China claims there’s no embargo, their restrictions on exports of these materials have driven the prices for certain metals into the stratosphere – up close to 1000% in some cases. As such, the timing couldn’t be better for the launch of an ETF seeking to capitalize on further price increases. The combination of headline hype coupled with the cache of alternative investments for the masses has gotten the attention of the retail investor. The problem is, there are only a few select companies that could even be considered a remote pure-play on Rare Earth Metals. I listened in on a Bloomberg interview last night with a Van Eck representative and they did qualify that the fund also holds non-pureplay companies, and hence the name “Market Vectors Rare Earth/Strategic Metals ETF”.
Rare Earth Metal Ruckus
China, aside from owning our debt, also owns over 90% of the Earth’s rare earth minerals, so as a financial and military adversary from whom the US can’t seem to stop buying things, the situation is rather dire. China occasionally “hints” at an all-out embargo, but even recent quota changes have sent a signal to the market by way of Molycorp’s (MCP) share runup. Molycorp is the closest thing to a publicly traded rare earth mineral company and shares have been extremely volatile, and primarily, up. While shares were up 11% Wednesday and down 12% on Thursday, a 3 month snapshot reveals an astounding 240% move. As previously highlighted though, since it wouldn’t be a very effective ETF if it held 90% of its weight in MCP, there are other non-core producers that mine other precious metals and industrial metals unrelated to the China supply constraint. Even with MCP diving 12% Thursday, the ETF managed to gain 1% on its opening day in a flat market, albeit an up market for other commodities and miners.
ETF Ticker: REMX
Expense Ratio: 0.63%
Performance: 0.97% opening day gain in a flat market
Top 10 Holdings (not all listed on US tradable exchanges):
Lynas Corp Ltd (OTCPK:LYSCF)
Iluka Resources Ltd (OTC:ILKAF)
Titanium Metals Corp (TIE)
Thompson Creek Metals Co Inc (TC)
OSAKA Titanium Technologies Co
RTI International Metals Inc (RTI)
Toho Titanium Co Ltd
China Molybdenum Co Ltd
Kenmare Resources PLC
Molycorp Inc (MCP)
Given the headline risk, we may be likely to see more fast money pouring into these names, thus driving this ETF further, but one does have to question if the recent runup and follow-through in the underlying equities are more hype than fundamentals. There are other outfits in Australia and elsewhere that are seeking to increase output of these materials, but given the time it takes to increase output and discover new sources, it is certainly plausible that prices of the underlying minerals will continue to spike. Another consideration is the race to the bottom in global currencies with next week’s QE2 announcement and a potential deflation of the most massive bond bubble in history. Depending on how those events unfold, the “precious metals” contributions from these companies could result in hefty gains as we’ve seen all year in everything from platinum ETFs to gold and silver.
Disclosure: Call Options on MCP for Nov expiry. No holdings in REMX.