Lithium ETF: A Battery Bet

09/19/2016 9:00 am EST

Focus: ETFs

Glenn Rogers

Contributing Editor, Internet Wealth Builder and The Income Investor

Our lives have become increasingly dependent on batteries, particularly when it comes to smart phones, laptops and tablets — and now electric cars, observes Glenn Rogers, contributing editor to Internet Wealth Builder.

Battery performance is always a concern. And that performance relies heavily on lithium, a relatively rare silver-white mineral with the largest known reserves in Chile, Argentina, and China. It is the world's lightest metal and the least dense solid element.

Tesla (TSLA) CEO Elon Musk has stated that in order to manufacture the 500,000 cars per year he has planned for 2018 he will absorb all of the world's current supply of lithium. That's one car company!

So how do we make money from this growing demand? Traditionally the way to play this sector has been to buy the shares of Sociedad Quimica y Minera de Chile SA (SQM) or a large chemical company like FMC Corporation (FMC) that has a significant lithium division. 

Both these companies are still good ways to invest in lithium and they deserve a closer look for investors seeking to benefit from this long-term trend.

For a more broad-based approach, however, look at the Global X Lithium ETF (LIT) that was launched six years ago to follow this trend. The fund started off slowly, as shown by its five-year average annual compound rate of return of -8.05%.

But it has come into its own this year and appears to have momentum going for it, plus an apparent growing supply-side deficit that could send lithium prices higher.

The ETF includes companies from the full spectrum of the lithium story, from the miners to end-users. SQM and FMC, which together combine for about 30% of the assets.

US stocks make up 34% of the portfolio while the rest are international, which means risk is spread out quite well.

This ETF really has no competition. Current fund assets are $106 million (figures in US dollars). Lately, however, it has pulled back a little and appears to be basing before a likely move higher.

Lithium is a great story but keep in mind that "Rare Earth metals" had a huge run a few years ago before crashing back to earth. In short, there is risk here (the beta is 1.25); this is not a widows and orphans stock.

With that caution, I think it is worth having a few units of this ETF in your portfolio since the lithium story is far from over. Action now: Buy with a target of $30.

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By Glenn Rogers, Contributing Editor to Internet Wealth Builder

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