ETF Of The Week: Rare Earth Trade War Winners

May 31, 2019

Hot Topic

Trading in REMX died down for the rest of the week, only to flare up once again on Wednesday, May 29, as state-run Chinese television channels threatened that the country was willing to use rare earth metals as leverage in its trade war with the U.S.

This volume spike also coincided with significant inflows into REMX: On May 22, the fund saw a net gain of $41 million in investor assets, followed by $22 million on May 23.

In the past month, the fund has taken in $66 million. To put that in perspective, REMX's total new net inflows for the 12 months prior to May 1 were just $13 million.

Not Just Rare Earths In REMX

Investors contemplating REMX as a way to play the tensions over rare earth metals should keep a few things in mind.

First and foremost is that REMX doesn't actually hold any physical metal: It's an equity fund that tracks rare earth metals producers, refiners and recyclers.

Furthermore, although rare earth metals are at the core of the current trade dispute, REMX actually holds producers of rare earth metals and strategic metals, such as lithium, cobalt, tungsten and so on.

This puts REMX somewhat in competition with other ETFs that own lithium, cobalt and/or titanium miners, like the Global X Lithium & Battery Tech ETF (LIT) or the Amplify Advanced Battery Metals And Materials ETF (BATT).

However, REMX is still cheaper than both those funds, with an expense ratio of 0.59% compared to 0.75% for LIT and 0.72% for BATT. REMX has also outperformed both its competitors year-to-date; LIT has dropped 8%, and BATT has dropped 7%.

 

Charts source: StockCharts.com; data as of May 30, 2019

 

China Eats Its Own Lunch

About 26% of REMX's portfolio is in Chinese companies, followed by Australia (25%) and the U.S. (11%). Since the Chinese exposure is in A-shares, there could arise a disconnect between how offshore and onshore companies would perform, should the proposed tariffs go into effect.

Finally, perhaps the biggest thing to remember is that China is increasingly becoming a consumer of its own rare earth metals, rather than just producing them for export. Therefore, the country may not be as dependent on U.S. consumption as it may seem.

Many analysts believe that any drop-off in U.S. consumption would be offset by a massive spike in prices that a rare earth metals tariff would inevitably cause. This would bolster support for the Chinese producers in REMX's portfolio—which would mean good things for the fund's future returns.

Contact Lara Crigger at [email protected].

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