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July sparks the one year anniversary of the launch of the first lithium ETF, the Global X Lithium ETF. Continued sophistication of innovative ETF products may one day result in additional and alternative vehicles with direct and concentrated exposure to a broader base of lithium exploration, development, production companies, or specialty battery manufacturing enterprises.
As the ETF industry continues to grow, July sparks the one year anniversary of the launch of the first lithium ETF, the Global X Lithium ETF (NYSE:LIT), along with 25 additional exchange traded products sharing the anniversary. With the size and scope of the product lineup aggressively closing on 1300, each week appears to bring a stream of new product duplications and innovations to the already crowded universe, having increased approximately 37 percent since last year.
From its inception, the glossy marketing material for the fund suggested to investors that the lithium ETF was designed to reflect a “full range of the lithium value chain, from mining, refining, and exploration to the production of lithium batteries. Stretching across asset classes, sectors, and geographies, the diversity of the fund’s holdings may better capture these distinct points of technological value-added, as compared to an investment at the individual company level.”
The objective for the lithium ETF was to provide exposure and investment results, “that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Lithium Index. The Solactive Global Lithium Index tracks the performance of the largest and most liquid listed companies that are active in the exploration and/or mining of Lithium or the production of Lithium batteries.”
A focused fund
At the establishment of the fund launch, the lithium ETF composition was heavily concentrated in its top three holdings, accounting for approximately 45 percent of the fund.The Chilean miner Sociedad Quimica y Minera (NYSE:QM) took the highest fund weighting at 20.16 percent with additional highly weighted companies including FMC Corporation (NYSE:FMC) at 16.67 percent and Rockwood Holdings Inc. (NYSE:ROC) at 7.93 percent rounding out the top 3. After one year, the concentration has actually increased with the respective weightings climbing to 21.94, 16.53 and 10.28 percent.
In December of 2010, the lithium ETF added a minor position in Rock Tech Lithium Inc (TSXV:RCK) and disposed of Globestar Mining Corp., which no longer is publicly traded on an exchange. Rock Tech is a Canadian-based resource company focused on acquiring, exploring and developing high-quality lithium and rare metals properties into sustainable and economic mines. The company has an exclusive interest in lithium properties in the Kapiwak Pegmatite Region in the James Bay area of northwestern Quebec and the Georgia Lake area of the Thunder Bay Mining District of northwest Ontario.
Performance attribution
As at the start of July, the fund was trading down 11.9 percent; however, the concentrated positions in the top 3 holdings offered some downside protection as they outperformed the remainder of the top 10. The top lithium producers all yielded positive returns with Rockwood Holdings representing the top performing stock with a 44.4 percent share price appreciation on a year to date basis. Following in the distance as second and third best, SQM and FMC provided positive returns for investors of 11.3 and 9.6 percent respectively. These positive year-to-date returns, in addition to a difficult business climate for battery manufacturers and exploration companies, are the primary reasons that the weighting has become more concentrated on the top three positions. Recent news developments have documented the escalating price for lithium, as inflationary costs increase with impacts on the production for a number of critical companies in the industry. In many instances, the difficult macroeconomic context has been reflective of share price movement in these businesses.
Efficient exposure
Since the lithium ETF launch the fund has traded at a par with its net asset value (NAV) for 140 trading days or approximately 59 percent of the time. The fund has traded at a premium for 83 trading days or approximately 35 percent of the time and as a discount for only 15 days representative of 6 percent of the time.
The Chief Executive Officer for Global X Funds, Bruno del Ama, spoke to Lithium Investing News indicating “the fund trades most of the time at or very close to NAV, so I am not sure I would necessarily represent this as a value opportunity (although clearly if the fund trades at a significant premium to its NAV, a market maker would arbitrage the difference, bringing the price back towards its NAV).”
Potential outlook for additional ETF products
According to a new whitepaper from BNY Mellon, assets in the ETF marketplace are expected to double before the end of 2015 to $2 trillion. This report examines various aspects affecting the swift expansion of the market and how asset managers may offer product suites that are passive, active, or somewhere in between. The next wave of growth for ETFs is being driven by new asset classes, new indexes and new ways to use ETFs as tools for portfolio construction. Continued sophistication of innovative ETF products may result in additional and alternative vehicles with direct and concentrated exposure to a broader base of lithium exploration, development, production companies, or specialty battery manufacturing enterprises.