Forget Oil, Invest In Lithium ETF

| About: Global X (LIT)

Worries are once again building up in the oil patch as the price of this liquid commodity slipped back to the $40 level lately on concerns of supply glut. The latest threats came from higher OPEC production and a rise in the number of rigs operating in U.S. oil fields for five successive weeks.

Oil started 2016 on an extremely low note, plunging to the below-$30 level in February, but finally sprang to $50 level on easing supply abundance. But with output in Canada coming on-stream after wildfire issues, raw crude inventory in the U.S. saw an unexpected rise last week.

After this backflip by the oil patch, a new metal is emerging and will presumably replace gasoline, at least if we go by Goldman Sachs. In fact, the research house recently termed lithium as the "new gasoline".

Why Lithium is Gaining Precedence

The fate of the metal lithium is often associated with electric cars and, in turn, with the electric car maker Tesla Motors (NASDAQ:TSLA). This is because this material is used in making lithium-ion batteries that power electric cars.

Upbeat Production Outlook by Tesla

Tesla remains upbeat on future production and has decided to expedite output to 500,000 units by 2018, rather than 2020 planned earlier. Notably, the company is witnessing a surge in demand for Model 3 cars. Higher car production will invariably drive up demand for lithium.

Will Electric Cars Transform the Entire Automotive Industry?

Per Bloomberg, keeping an electric car will be more affordable than buying and running a petrol or diesel car six years down the line. Moreover, the global drive against the emission of greenhouse gas will eventually boost demand for electrically run cars than conventional diesel-driven cars.

Bloomberg also noted that electric vehicle at present accounts for just 1% of global vehicle sales, promising stellar growth. It is expected to constitute about 35% of all light-duty vehicle sales by 2040.

Needless to say, lithium will cash in on this high demand. With surging sales, manufacturing costs are on a downhill ride, thanks to economies of scale.

Usage of Lithium in High-Tech Gadgets

Lithium-ion battery is also used in mobile phones, smartphones, laptops, tablets, etc. Though global smartphone sales are expected to slow down in 2016, there is still ample scope in the underpenetrated emerging nations. Plus, there is demand from other gadgets like laptops and tablets. All these have kept up demand for lithium.

China: Yet Another Driver

China, which is focused on lowering greenhouse gas emission and turning environmentally friendly, is likely to opt for more lithium batteries for electric buses and other vehicles. The country is even offering incentives to electric car manufacturers to promote this area.

Market Impact

At present, there is only one way - the Global X Lithium ETF (NYSEARCA:LIT) - to target this space from a global perspective. We have described LIT in greater detail below.

Lithium ETF in Focus

The product looks to give global exposure to the broad range of firms engaged in the mining of lithium or development of lithium batteries. The product tracks the Solactive Global Lithium Index, giving access to the 25 largest and most liquid firms around the globe.

The fund has amassed about $115.8 million in its asset base and trades in moderate volume of nearly 150,000 shares per day. This increases the total cost of the fund in the form of a wide bid/ask spread beyond the expense ratio of 0.77%.

American firms dominate the portfolio with 34% share, while Australia and Chile round off to the next two spots with a double-digit allocation each. From a sector look, the ETF is heavy on materials with a 56% share, followed by industrials (17.9%) and consumer discretionary (14.6%).

The fund is highly concentrated on two firms - FMC Corp. (NYSE:FMC) and Quimica Y Minera Chil-SP (NYSE:SQM) - which together make up over 30% of its total assets. Other firms hold less than 7% in the basket. LIT is up about 21% so far this year (as of August 2, 2016).

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