RHJ/iStock via Getty Images
Recently, an under the radar policy announcement from the Chinese government caught my eye. Following the requirement for additional export permits for gallium, germanium and graphite earlier in the year, China upped the trade war ante by banning the export of technologies for processing rare earths, key materials that are used in clean energy and high tech electronics.
The latest actions by China are likely in retaliation to President Biden’s recent ban on the export of advanced semiconductor chips and technologies, as well as policies excluding Chinese made EVs and batteries from American government subsidies.
According to the International Energy Agency, China accounts for about 60 per cent of the world’s rare earth mining production, but almost 90 per cent of processing and refining of rare earths.
For investors, China’s rare earth export ban may have far reaching consequences. On the downside, for clean energy and semiconductor companies, they may see additional costs as key input ingredients may be supply restricted. On the other hand, for non-Chinese controlled producers of rare earths, they may see a boost to demand for their products, as Western companies shift their supply chains to circumvent China’s export ban.
This article reviews the VanEck Rare Earth/Strategic Metals ETF (REMX) to see if it stands to benefit from the escalating geopolitical tensions.
Fund Overview
The VanEck Rare Earth/Strategic Metals ETF seeks to replicate the MVIS Global Rare Earth/Strategic Metals Index (“Rare Earth Index”), an index that tracks the performance of companies involved in producing, refining, and recycling of rare earth and strategic metals and minerals.
The REMX ETF claims to provide convenient access to the Rare Earth/Strategic Metals industry. Companies included in the REMX must derive at least 50% of their revenues from the rare earth/strategic metals industry and may include Shanghai-listed companies.
The REMX ETF has close to $400 million in assets and charges a 0.54% net expense ratio (Figure 1).
Figure 1 – REMX overview (vaneck.com)
Portfolio Holdings
Figure 2 shows the geographical allocation of the REMX ETF. Approximately 1/3 of the fund’s holdings are based in Australia, 30% are based in China, and the rest are based in Canada, the U.S. and the rest of the world.
Figure 2 – REMX geographical allocation (vaneck.com)
However, studying REMX’s portfolio, I have 2 concerns with the fund. First, the REMX ETF is very concentrated, with only 28 stocks in total and the top 10 stocks contributing 60% of the portfolio. A concentrated portfolio could cause greater volatility as individual stocks may have a bigger influence in the fund’s overall performance.
More importantly, looking at REMX’s holdings, we find that for a ‘rare earths’ fund, only 22% of the fund’s holdings are rare earth companies. Instead, 59% of the holdings are lithium miners or developers (Figure 3).
Figure 3 – REMX portfolio (Author classification based on holdings file from Vaneck)
In fact, for investors interested in non-Chinese rare earths exposure, the REMX ETF only offers holdings in Lynas Rare Earths (OTCPK:LYSDY) and MP Materials (MP) at a combined 12% of the portfolio. This exposure appears miniscule relative to the fund.
Returns
Figure 4 shows the historical returns of the REMX ETF. The REMX has been very volatile, with annual returns regularly ranging from -40% to 80%. However, over the long-term, 3/5/10 year average annual returns have been modest at only 4.1%/4.7%/-3.5%, respectively, to November 30, 2023.
Figure 4 – REMX historical returns (morningstar.com)
Moreover, since the REMX ETF is so heavily concentrated in lithium miners and developers, we find that REMX’s historical performance is closely correlated to the price of lithium carbonate (Figure 5).
Figure 5 – REMX is closely correlated to lithium carbonate prices (Author created with data from stockcharts.com and tradingeconomics.com)
When lithium carbonate prices took off in 2020 and 2021, the REMX ETF did extremely well, returning 63% and 80%, respectively. However, as lithium carbonate is currently in a steep multi-year bear market (down more than 80% from its 2022 peak), the REMX lost 31% in 2022 and 21% so far in 2023.
Conclusion
The VanEck Rare Earth/Strategic Metals ETF is marketed as a rare earths/strategic metals focused fund that gives investors convenient 1-stop access to the industry. However, upon closer analysis of the fund’s portfolio holdings, we see that the REMX ETF only has a relatively small 22% allocation to rare earths companies.
Furthermore, REMX’s historical returns are closely correlated to the price of lithium carbonate due to the fund’s ~60% concentration in lithium miners and developers. For investors seeking rare earths exposure and returns, I fear they will be sorely disappointed.
As a way to gain exposure to the rare earths theme, I would personally avoid the REMX ETF and seek individual stocks like Lynas Rare Earths and MP Materials. I rate the REMX ETF a hold.
