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Rare Earth Metal ETF to Surge on Chinese Export Ban

Sweta Killa
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Amid worsening trade dispute, media reports suggest that China is considering restricting rare-earth exports to the United States as a countermeasure against the ban on telecom giant Huawei. Chinese president Xi’s visit to a rare earths facility in Ganzhou, Jiangxi province last week triggered speculation that China could make the minerals more expensive or unavailable if the trade war continues.

China exports about 80% of rare earths, which is critical in defense, energy, electronics and automobile sectors, to the United States. Beijing might use its dominant position as a supplier of the commodities for leverage in the trade war. Rare earth minerals are a group of 17 elements used in production in a huge number of sectors, from consumer electronics to national defense.

As part of the trade war so far, Chinese Chinese rare-earth exports have been spared from tariffs by the United States, which has decided not to impose import duties on those and some other critical minerals from China. However, Beijing is expected to implement tariffs increase on imports of U.S. rare-earth metal ores from 10% to 25% from Jun 1, making it less cheap to process the material in China (read: Tense About Trade War? Follow Goldman With 5 ETF Strategies).

This is not the first time when Beijing is weaponizing its dominance in the rare earth market. It had adopted the same tactics in 2010 against Japan by halting shipments of rare earths to its rival, disrupting supply lines for major manufacturers like Toyota and Panasonic.

Market Impact
    
Since China has the monopoly over rare earths, the news sent rare-earth producers’ stocks higher in today’s trading session. In China, shares of China Rare Earth Holdings Ltd increased more than 30% in early trade while shares of JL Mag Rare-Earth skyrocketed around 10%. Innuovo Technology jumped 10% and China Northern rose 8.7%. Lynas in Australia — one of the few rare earth miners outside of China — also saw its shares surged more than 15% at the time of writing.

The smooth trading is expected to continue in the ETF space targeting the rare earth minerals - VanEck Vectors Rare Earth/Strategic Metals ETF REMX.  

REMX in Focus

It offers exposure to companies engaged in producing, refining, and recycling of rare earth and strategic metals and minerals. The ETF follows the MVIS Global Rare Earth/Strategic Metals Index, holding 20 stocks in its basket. It is heavily concentrated on the top 10 companies, which account for nearly 63.2% of the assets. China Northern Rare Earth Group, Tronox Holdings and China Molybdenum Co are the top three holdings making up for more than 7% share each. Other securities hold no more than 6.76% of total assets (read: What's Behind the Recent Surge in Rare Earth ETF?).

From a country look, Chinese firms dominate the portfolio with 26.3 share, closely followed by Australia (24.9%) and the United States (11.3%).

REMX is the only ETF targeting the pure rare earth metal space having AUM of $194.5 million and average daily volume of 188,000 shares. The product charges 59 bps in annual fees and has gained 6.8% in the year-to-date timeframe.

Bottom Line

The positive news on rare earth metal could provide some lift to the ETF at least in the near term (read: all the Material ETFs here).

Since the fund’s valuation seems reasonable after falling over 37.1% in the trailing one-year period, this could be the time to take a closer look at REMX for a new way to play commodity mining that promises a bright future.

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VanEck Vectors Rare Earth/Strategic Metals ETF (REMX): ETF Research Reports
 
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