ETF Of The Week: Rare Earth Trade War Winners

May 31, 2019

On Wednesday, the U.S.-China trade war took a worrisome turn, when Chinese state media suggested the country could levy new tariffs on U.S. rare earth metal exports, in retaliation for the Trump administration's blacklist of Chinese telecom Huawei.

That would put U.S. tech companies, defense contractors, auto companies and health care firms in a bind. Rare earth metals that have become ubiquitous throughout their supply chains are largely sourced from China. Should rare earth metals prices skyrocket, U.S. firms would either have to cut back on their own production, or cascade higher prices down to the end consumer.

However, one U.S-based ETF would likely gain: the $199 million VanEck Vectors Rare Earth/Strategic Metals ETF (REMX). In fact, REMX has already seen boosted volume and flows over the past two weeks as a result of the trade dispute, with more activity sure to follow.

What Are Rare Earth Metals?

Rare earth metals (also known as rare earth elements) comprise a list of 17 elements, including the 15 lanthanides as well as scandium and yttrium. (However, they don't include other headline-making strategic metals like lithium or cobalt.)

Bright, soft and fairly temperamental—at least in chemical terms—the rare earth metals aren't actually all that rare in the earth's crust. But it's difficult to find them in large concentrations, and mining rare earth metals can be tough and expensive.

Used in trace amounts across tons of modern-day devices, rare earth metals can be found in everything from cancer drugs to aircraft engines, and from fluorescent light bulbs to electric car batteries. They're also used in consumer electronics, like tablets and smartphones, to make them smaller and more energy efficient.

For example, Apple (AAPL) is a massive consumer of rare earth metals, using them in its cameras and speakers (read: "iPhones & Teslas: 2 Rare Earth ETF Bets.)

 

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

 

Where They Come From

Although China possesses 37% of world rare earth metal reserves, it accounts for roughly 70% of global production. That was intentional: In the late '90s, China ramped up its production capacity of rare earth metals, while the U.S. and other countries wound down their production.

As such, only one rare earth mine remains in the U.S. (Mountain Pass, in California), and today, the U.S. relies on Chinese imports for about 80% of its annual supply. Furthermore, even Mountain Pass is dependent on China for refining capacity. There are no rare earth metal refineries located outside China.

This means that, should the proposed Chinese tariffs on rare earth metals go into effect, the U.S. can't shift production stateside to compensate, because it simply doesn't have the production facilities. It would take years to ramp up that capacity again. Nor can other countries meaningfully fill the gaps. The U.S. needs Chinese rare earth metals. And the Chinese know it.

Massive Volume, Flows Into REMX

Year-to-date, REMX has performed decently, rising 9.44% on the back of U.S.-Chinese trade war tensions that began to intensify in March. Over the longer term, however, the fund hasn't done so great; since its price last peaked in January 2018, REMX has fallen 54%:

 

 

Starting last week, there was a massive uptick in REMX's trading volume. In the 10 years since it had first launched, REMX hadn't traded more than 700,000 shares in a single day. Then on Monday, May 20, traders exchanged more than 3 million shares; the next day, roughly 5 million shares traded. The volume spike coincided with a trip that Chinese President Xi Jinping took to the country's largest rare earth metals production facility.

Find your next ETF

CLEAR FILTER