Rare Earth Metal ETF REMX Review – Cheap Well Diversified Way to Play the High Risk sector

Van Eck Global has come out with a Rare Earth Metals ETF (REMX) which offers investors an opportunity to get a diversified exposure to this commodity sector .Rare Earth has become a “geopolitical problem” rather than a demand/supply problem with Chinese monopoly over the mining and production of REE.Note materials for Green Industries have become a hot investment sector in recent days with current and future shortages fueling a strong price rally.Global X had launched a Lithium  (LIT) ETF which is an investment vehicle into Lithium and Battery/EV producers.Like LIT which can hardly be called a pure play Lithium play,REMX is also not a pure investment into the REE sector.Rather it offers an investment into a wide variety of strategic ores and metals such as titanium,zirconium etc.REMX analysis shows that it is very well diversified geographically and across companies.This is a good in my opinion since many of the rare earth companies that have recently seen their stock prices shooting up are very risky.Most of these companies will take anywhere between 1-5 years to start production and the quality of their reserves,management,environment permitting etc. is highly uncertain.Note  mining of rare earths is  very environment unfriendly which is ironic since they are mainly used in Green Industry.Here is a list of the features of this new ETF

1) 0% Large Cap Exposure – The company is mainly made up of mid caps and small cap  stocks which is not surprising considering that most of the rare earth metals are mined by small specialized companies.Increases the risk

2) 85% concentration on 5 countries – The ETF has constituents which  are mainly concentrated in 5 countries – Australia,Canada,USA,China and Japan.

3) 30 Constituents and Titanium Exposure – The ETF is composed of 30 contituents with a maxium of 8.8% to Lynas and  1% to Dai ichi Kigenso Kagaku-Kogyo Co.3 companies in the top 7 holdings of the ETF are Titanium Compaies which shows that the ETF is not restricting itself to Rare Earth Metals

4) Valuation – The ETF valuation is high by conventional metrics such as P/E (38x)  and P/B (4.5x).But you have to keep in mind that many of these companies have not started generating earnings as of now.Also the resources held by the company are strategic in nature and cannot be estimated by plain P/B ratios.Note Japan is scouting desperately for rare earths in Vietnam,Kazakhstan and India.

5) Low Expense – The ETF expense is quite low at 0.63% of the Fund Expense and seems quite reasonable considering its holdings across various stock  markets.It will be quite difficult for investors to replicate and managed holdings across various geographies at such a low expense.

Summary

The Chinese embargo against rare earth exports to Japan has led to a exponential rise in the stock prices of REE stocks.While the price increase and government interest would lead to additional supply of these REE,it would take some time for the supply to hit the markets.Companies are forecasting a 10-20% supply shortage in 2014 which is quite possible given the environmental problems created by the radioactive nature of the REE ores.Green Industry growth has been greatly been underestimated by policymakers and analysts.REE offers a great way to play the growth of Green Industry and the growing China – ROW tensions.While some are already comparing REE to Internet stock bubble,there is a long way to go for a REE  bubble to form as we are still a long way away from nosebleed bubbles.