RHJ/iStock via Getty Images
VanEck Rare Earth/Strategic Metals ETF (REMX) has many top tier rare earth, lithium and other strategic metals companies in its portfolio. These types of companies tend to offer higher risk and higher reward, so I like the fact that investors are getting some diversification. When you buy this ETF you are betting on the sector rather than taking on the risk of investing in a single stock, along with the downside risks that this comes with. This ETF has about $354 million in assets under management, and an expense ratio of .54%. It has a 30-day SEC yield of 2.2%.
The returns on this ETF have not been good in the past 2 to 3 years. For example, this ETF is down about 37% in the past year, and it is down around 31% in the past 3 years. However, the total return for the past 5 years is about 19%, which is not great on a relative basis, but at least positive. Much of the poor performance has been due to the declining price of lithium as well as rare earths. For example, lithium prices are down by about 80% from the 2022 highs. However, lithium and rare earth prices might be poised to rebound and that could make this ETF turn in much stronger returns over the next couple of years.
The Chart
As the chart below shows, REMX shares have been in a significant downtrend since July 2023. More recently, however, this ETF appears to be poised for what could be a new breakout. REMX is now trading above the 50-day moving average which is around $50.18 and it could be heading for $62.42, which is the 200-day moving average. It appears that the worst is over and significant upside potential remains if the rebound continues, as the share price is still well below the roughly $110 highs of 2022.
Stockcharts.com
Why Rare Earths, Lithium And Other Strategic Metals Are Worth Investing In
Because of China’s weaker than expected economy and other factors, the prices of rare earth elements have been declining and this has put significant pressure on many of the holdings in this ETF. While the performance has not been good in recent years, the long term story remains strong. Lithium is used in batteries for electric vehicles, and rare earths are used in many industries, including military, technology, automotive, and renewable energy. Many of these industries are likely to see significant growth in the coming years which could drive demand and raise prices for lithium and rare earths.
In April, a Seeking Alpha news article reported that Australian billionaire, Gina Rinehart, had purchased a 5.3% stake in MP Materials (MP), which produces rare earths, and this purchase adds to her portfolio of rare earth investments.
China Could Drive The Rebound
China’s economy has had multiple setbacks in the past few years from the pandemic shutdowns to a real estate crisis, as well as rising tariffs on Chinese exports. When the shutdowns ended in China, many investors expected a sudden rebound, but it has been slow. However, there are some clear signs that the worst is over and China could finally be starting to see growth picking up. A Seeking Alpha news release by Meghavi Singh states that China’s manufacturing PMI hit a 13 month high.
A Review Of Some Top Portfolio Holdings
Ablemarle (ALB) is a major producer of lithium. It represents about 8% of the portfolio for REMX, which makes it the largest position. This stock was trading for around $240 per share in July 2023, but it has been cut in half and now trades for about $120 per share. This stock looks undervalued and analysts at Bank of America (BAC) upgraded this stock on April 10, 2024, setting a price target of $156 per share. But more importantly, the analyst believes that lithium prices have bottomed out and should rise from here. That could also help other portfolio holdings for REMX. A Seeking Alpha news article by Carl Surran states:
“Lithium carbonate prices peaked at ~$80K/metric ton in November 2022 and bottomed at ~$13K/ton in February 2024, but prices have ticked up lately to ~$16K, and BofA’s Matthew DeYoe sees more gains ahead.
Given recent pricing improvement in spodumene and lithium salts, DeYoe believes it will see a near-term reduction in lithium inventory levels in China, which would reinforce the upward move in lithium chemical pricing.”
MP Materials is a leading producer of rare earth elements and it represents about 5.32% of the portfolio for REMX. This company is one of the only producers of rare earth elements in the Western world, and it was recently trading near 52-week lows, which I thought was a buying opportunity. I wrote about this company more extensively in this article.
Sociedad Quimica y Minera (SQM) is a major producer of lithium, and is based in Chile. This stock represents about 5.5% of this ETF’s portfolio holdings. This stock looks deeply undervalued as it trades for just around 10 times earnings for 2024, and even less when considering 2025, and 2026 earnings estimates. On top of that, this stock pays a dividend yield of around 9.74%.
This ETF holds a number of positions in smaller companies that are not based in the U.S. and even trade on foreign exchanges. These assets might be higher risk and less liquid which is something to consider.
Potential Downside Risks
This ETF has invested in some Chinese mining stocks and this could be a potential downside risk, since China could control exports from these firms. Additional economic weakness from China or a global recession could significantly reduce demand for lithium, and rare earths metal. As mentioned above, the foreign securities this ETF holds could also be a potential downside risk due to liquidity and being located in foreign jurisdictions.
In Summary
With so many stocks and ETF’s currently trading at or near 52-week highs, it is a potential opportunity to buy this ETF before it has had a big run up in price. Lithium prices do seem to have bottomed out and perhaps rare earth prices have as well. The future demand looks strong for these types of strategic natural resources and that’s why a rebound could be coming next.
No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
