Time To Buy The Rare Earth Metals ETF (REMX)? - Commodity ETFs
29 December 2011 - 10:01PM
Zacks
Although 2011 has been pretty rough for commodities across the
board, some sectors have managed to surge higher on the year. One
of the biggest gainers in the early part of the year was
undoubtedly rare earth metals as investors scooped up the miners of
these important products which are found in everything from cell
phones to guided weapons. Nevertheless, thanks to recent concerns
over Chinese demand and the European economy, prices for these
crucial elements are down significantly from the peak, casting a
shadow over the industry heading into 2012.
In light of this recent weakness for many rare earth metals,
China has decided to more or less keep the rare-earth export quota
constant for the new year, hoping that flat supply will boost
prices once again for the sector. This could especially be true
given that China currently dominates the market, making up nearly
90% of the total global supply. Yet, unfortunately for the sector,
the weakness in the economy is really beginning to hurt end users
of the metals, pushing them to really cut down on the use of these
ultra high cost products. “The quota has become pointless if export
demand falls short of the limits,” said Wei Chishan, a
Shanghai-based analyst at SMM Information & Technology Co., a
data provider. “Rare-earth users are under great pressure to pass
on surging costs, while the global slowdown has slashed demand.”
(read Is USCI The Best Commodity ETF?)
With these pressures and the general push away from
commodity-focused investments in the last few months, investors in
the main ETF tracking the sector, the Market Vectors Rare
Earth/Strategic Metals ETF (REMX) have seen huge losses. The
product is trending towards a 52 week low and has fallen by 36%
over the course of 2011, including a nearly 41% loss in the past
six months alone. Yet, while 2011 has been disastrous for REMX,
there is still some hope that 2012 will produce far better returns
for those invested in the sector (also read Can You Fight Inflation
With This Real Return ETF?).
That is because while demand is slack right now, the incredible
importance of the materials in this space and their wide range of
applications ensures that they will always see a decent level of
buying. Rare earths are used in everything from jet engines, hybrid
technologies, flat screen TVs, and a host of other applications
meaning that weakness in any one sector is unlikely to scar the
industry too badly. Furthermore, as Japan continues to rebound, its
use of rare earths—especially if it tilts towards clean
energy—could surge, putting upward pressure on prices going forward
(see Three Best Gold ETFs).
Add in the fact that China thoroughly dominates the supply of
these crucial products and that no further meaningful supplies can
come online quickly, and one can easily argue that the slump in
rare earths is more about confidence than fundamentals. For
investors seeking to make a play on this beaten down sector in
hopes that 2012 will be far better for the industry, a closer look
at the Market Vectors Rare Earth Strategic Metal ETF (REMX) is
needed:
Rare Earth Metal ETF In Focus
For investors seeking to make a play on the sector, REMX is
truly one of the only choices available in the space. The fund
tracks Market Vectors Rare Earth/Strategic Metals Index, which is a
rules based, modified capitalization weighted, float adjusted
benchmark 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. Currently, the
product charges investors 0.57% a year in fees and has close to
$210 million in AUM, suggesting that the product is in line with
others in the category for expenses and that the fund has attracted
a decent amount of interest from investors (read Time To Consider
The Silver Miners ETF).
In total, REMX holds 27 securities, putting just about 60% of
assets into the top ten holdings with high weightings going towards
Iluka Resources, Lynas Corp, and Titanium Metals (TIE). The fund
has a definite tilt towards small and mid cap securities as just
7.7% of assets go towards equities that have a market cap above $5
billion. The Van Eck fund also has heavy exposure to international
and especially developing markets, suggesting that it is already
prone to heavy bouts of volatility in short time frames.
Undoubtedly, REMX can experience another huge slump in 2012,
especially if the economy remains weak and investors continue to
shun commodity-focused assets. Yet, given the strong underlying
fundamentals of the industry, and the importance of rare earths to
virtually every sector of the high tech economy, there is a pretty
strong chance that this rare earth metal ETF could see a solid
period of trading going forward. As a result, a small allocation to
the space could be warranted by investors who have a high risk
tolerance and believe in the strength of these products over the
long term despite short term pressures.
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