REMX: Cautiously Bullish On This Global Rare Earth/Strategic Metals ETF

Summary

  • REMX invests in rare earth and strategic metals producers, which may become the most important sources of energy and economy in the future.
  • During the past 12 months, REMX’s investments in Australian, Canadian and French miners delivered positive price growth, while investments in Chinese, American, and Dutch companies generated negative price growth.
  • REMX has to overcome commodity risk, currency risk, political risk, supply-chain risk and risk arising out of its non-diversified portfolio.
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Periodic Table Element Neodymium

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VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) is an exchange-traded fund ("ETF") that invests in rare earth and strategic metals miners throughout the globe. These rare earth and strategic metals are vital for computerized devices and electric vehicles. The average yield has been low and the investors are primarily dependent on price growth of this fund. The price growth over the medium term, i.e., in the past 3 years and 5 years has been quite strong and these stocks are expected to generate high returns in the coming years as rare earth and strategic metals are considered to be the most important sources of energy and boosters for the economy in the future.

VanEck Vectors Rare Earth/Strategic Metals ETF

VanEck Vectors Rare Earth/Strategic Metals ETF was launched and is managed by Van Eck Associates Corporation. The fund was formed on October 27, 2010 and pays annual dividends. Barring a few years, the yield has been low. The yield for 2022, however, is quite high at 6 percent. Going by the past records, it'll be unfair to expect such yield to continue for a longer period of time. This high yield may have resulted from significant capital gains in 2021, which might fail to materialize this year or the coming years. The year-till-date (YTD) capital gains have been low and thus there may be a very low pay-out the next time. Thus, this fund doesn't qualify to be a good investment option for income seeking investors.

VanEck Vectors Rare Earth/Strategic Metals ETF invests in stocks of companies operating across materials, metals and mining sectors. It benchmarks itself against the MVIS Global Rare Earth/Strategic Metals Index, by using full replication techniques. The index includes companies primarily engaged in a variety of activities that are related to the producing, refining and recycling of rare earth and strategic metals and minerals. These rare earth and strategic metals included lithium, tungsten, ferronickel, cobalt, boron, zircon, and antimony.

In this age of computer technology and digital economy, cell phones, laptops, automobiles, and other computerized devices have become essential parts of life. All these industries require these rare earth metals in order to function optimally, and so these have become indispensable in the global supply chain. Most importantly, these elements lack cheap and easily available substitutes. As a result the global demand of these rare earth metals and their alloys are increasing exponentially. Not surprisingly, REMX has made many of its investments in Australia (45 percent), China (26.5 percent), and the United States (16 percent), as all these countries have the largest reserves of rare earth and strategic metals.

How the REMX Portfolio Performed During the Past 12 Months?

Almost 55 percent of investments are made in companies from Australia, Canada, and France. Top investments in these market included Pilbara Minerals Limited (OTCPK:PILBF), Allkem Limited (OTCPK:OROCF), Lynas Rare Earths Limited (OTCPK:LYSCF), Liontown Resources Limited (OTCPK:LINRF), Core Lithium Ltd (OTCPK:CXOXF), Iluka Resources Limited (OTCPK:ILKAF), AVZ Minerals Limited (OTCPK:AZZVF), Lake Resources NL (OTCQB:LLKKF), ioneer Ltd (OTCPK:GSCCF), ERAMET S.A. (OTCPK:ERMAF), Lithium Americas Corp. (LAC), and Standard Lithium Ltd. (SLI). Barring SLI.V, all generated positive price growth in the past one year.

On the other hand, almost 45 percent of REMX's corpus is invested in companies based in China, US, and Netherlands. These companies included Zhejiang Huayou Cobalt Co Limited (603799.SS), China Northern Rare Earth (Group) High-Tech Co Limited (600111.SS), Xiamen Tungsten Co Limited (600549.SS), Shenghe Resources Holding Co Ltd (600392.SS), Ganfeng Lithium Co., Ltd. (OTCPK:GNENY), Livent Corporation (LTHM), Piedmont Lithium Inc. (PLL), MP Materials Corp. (MP), Tronox Holdings plc (TROX) and Advanced Metallurgical Group NV (ADG.AS). Barring LTHM, all suffered price loss during the past one year. Thus, we can clearly understand where the growth lies.

Underlying Risks with REMX

REMX has created an impressive geographic diversity but lacks sectoral diversity. High levels of concentration in rare earth metals increases portfolio risk and volatility. Geographic diversity has its own demerits. Some countries may abruptly increase taxes or fees for conducting mining operations, which may hurt the companies in which REMX has invested. There is a common practice in certain countries to bribe government officials in order to obtain such a mining license, which again increases the risk of corruption.

The fund also undertakes commodity risk. In case the prices of rare earth metals decline, the fund will suffer major losses. Due to the cyclical nature of the commodities market, this is bound to happen in the long run. The fund also faces currency risks due to its geographical diversification. Any major appreciation or depreciation in currencies will have a significant impact despite the stocks performing well in their respective stock exchanges. The covid-19 pandemic and the ongoing war in Ukraine has taught us how a disruption in supply chain can adversely impact the prices and availability of such rare earth metals. A conflict over Taiwan may multiply this risk.

Investment Thesis

REMX is a non-diversified fund of little more than 20 companies that are involved in the mining of rare earth and strategic metals vital for the electric vehicles and computerized devices. This fund has a moderate expense ratio of 0.53 percent, and an asset under management (AUM) of $824 million. During the past year, REMX's investments in Australian, Canadian and French miners delivered positive price growth, while investments in Chinese, American, and Dutch companies generated negative price growth. However during the past 3 to 5 years, the fund has recorded significantly high growth.

As cell phones, laptops, automobiles, and other computerized devices require these rare earth metals and lack proper substitutes, the global demand of these rare earth metals and their alloys are increasing exponentially. Due to this, the companies will surely witness a sustainable high price growth in the future. Thus, I am bullish on VanEck Vectors Rare Earth/Strategic Metals ETF. However, before investing, investors must also consider the commodity risk, currency risk, political risk and risk arising out of its non-diversified portfolio as well as the low average historical yield.

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