Ins and Outs of Rare Earth ETFs

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 |  Includes: LIT, REMX
by: Tom Lydon

A vast majority of the world’s rare earth metal supply is found under China’s soil, which basically makes the rare earth metals market and ETF dance to the Chinese government’s tune.

What Are the Rare Earth Metals? Rare earth metals include lanthanum, cerium, praseodymium, neodymium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium, and yttrium, with neodymium, dysprosium, terbium and europium having the highest demand, according to Business Insider.

Who Controls the Market? That would be China, which produces more than 95% of global rare earths supply. The country is now imposing export quotas and tariffs on its supplies, which total 89 million tons. That’s bad news for countries like Japan that solely relies on China for its supply.

Still, other countries may fill the supply gap:

  • Malaysia sits on a reserve base of 35,000 metric tons
  • Brazil has a reserve base of 84,000 tons
  • India holds 1.3 million metric tons
  • The United States has 14 million metric tons, but no additional mines have been created in recent years
  • Canada’s junior minors have been expanding the country’s production of rare earths as more reserves are being discovered
  • Chile is considered to be the “Saudi Arabia of Lithium,” with around 27% of the world’s proven reserves, while Bolivia is estimated to have 50% of the world’s lithium

What Are the Uses of Rare Earth Metals? Lithium is a major component in most gadgets and batteries. Rare earth metals are also used in powerful magnets that go in anything from lasers and fluorescent lamps to electric motors and disk drives.

What’s the Demand Like? Demand for rare earths is expected to hit 200,000 tons, valued at around $2 to $3 billion, by 2014, with 25% of new demand coming from technological advances. In China, demand of rare earths is forecast to outstrip supply by 2012.

The Market Vectors Rare Earth/Strategic Metals ETF (NYSEArca: REMX) is a relatively new ETF that holds stock of minor metal producers, while Global X Lithium (NYSEArca: LIT) gives exposure to lithium producers.

The Bottom Line. Rare earths are an interesting and unique market, and once again, ETFs have stepped up to give ordinary and professional investors alike access to it. There’s certainly a case to be made for rare earths, considering the growth of new technologies. Market Vectors’ and Global X’s ETFs are easy ways to get exposure to the producers while giving you an alternative way to play the growth of industries that widely use the elements.

Max Chen contributed to this article.

Disclosure: None