By Carolyn Pairitz
While key commodities such as corn, gold, and copper often dominate the spotlight, a group of metals known as ‘rare earths’ have a reputation of truly shining through with amazing returns. In fact, some of the top metals in the group, such as Neodymium, Dysprosium, Yttrium, and Erbium, put up gains in the past that would make metals such as silver or gold’s historic performances in 2011 look down-right bearish. For example, of the four rare earths outlined above, the worst performer in 2011 had a gain of ‘just’ 50% while several saw their prices surge by over 200% in year-to-date terms. Returns in 2012 have not matched these amazing standards set by the previous year, but that doesn’t mean this market will not surge again.
Unfortunately, due to their spread out nature in the earth’s crust– which makes these metals more rare than their actual abundance might suggest– and the often environmentally-unfriendly ways in which some of these products are obtained, these commodities are hard to find in futures contracts or in physical ETFs. It is estimated that China produces close to 95% of the world’s total supply of this group of metals, further preventing the group from receiving the liquidity and accurate pricing that comes from being traded on a major exchange.
Why You Should Care
While China’s dominance of the rare earth metal trade may make it tough to invest in the metals, it is making it downright impossible for westerners to get the access to these commodities. While you may not have heard of many of the products that constitute rare earths, they are pretty much ubiquitous in every day life. These metals find their way– in small quantities– into everything from wind turbines and guided missiles, to consumer goods like home electronics and kitchen appliances. Without unfettered access to these metals, prices for pretty much everything that can be considered high tech will go through the roof.
This is especially troubling when considering China’s attitude towards exports of the metals in recent years as the country has begun to heavily clamp down on shipments to other nations. Given that China may close down more mines in the future to attempt to protect the environment or further tighten exports in order to provide for its domestic economy, more cuts from the nation are certainly not out of the question.
REMX: The Only Pure Play
Thanks to this precarious situation, as well as rising demand for these key products, many western nations have been scrambling to find or restart mines that can provide the world with fresh supplies at a reasonable price. This could start a new golden age for the mining sector making investments in rare earth metal miners an interesting proposition for commodity-focused investors seeking to venture off of the beaten path. While there are a few major publicly traded rare earth miners in the U.S., the space remains fraught with individual company risk. As a result, many investors should take a closer look at this Van Eck fund as a way to cheaply and easily play the space, the Market Vectors Rare Earth/Strategic Metals ETF (REMX).
REMX tracks a rules based, modified capitalization weighted, float adjusted index intended to give investors a means of tracking the overall performance of publicly traded companies primarily engaged in a variety of activities that are related to the mining, refining and manufacturing of rare earth/strategic metals. On average, the fund consists of 28 holdings with the biggest weights historically going towards Iluka Resources, Kenmare, and Titanium Metals Corp, all of which make up at least 7% of the fund each. In terms of country exposure, the fund mostly consists of developed, Western markets with Canada, Australia, and the U.S. all making up about 15% of the holdings each, although some emerging markets, including China, Mexico, and Chile, do have some influence in the fund.
In 2011, REMX never matched the performance of its underlying commodities– much like other miners– and it ended the year by posting a total loss of about 34%. Investors should also note that the fund is relatively volatile and has a beta of 2.37. Despite some of its shortcomings, the fund could be a decent long term play for investors who are bullish on rare earths but are looking to take a basket approach when it comes to investing in this increasingly important sector.
Disclosure: No positions at time of writing.