REMX VanEck Rare Earth and Strategic Metals ETF

Although the economy continues to hum along, some sectors have had trouble picking up steam in 2012, despite their highly sensitive nature. In this space, a curious case has undoubtedly been in the basic materials sector, specifically when investors look at the mining segment.

In this corner, the broad materials sector, as represented by the ultra popular Materials Select Sector SPDR ETF (XLB) has seen solid performance when compared to the focused mining industry as represented by the SPDR S&P Metals & Mining ETF (XME). In fact, XLB has performed roughly on par with the S&P 500 in year-to-date terms while XME has lagged by almost 1,000 basis points.

This is especially surprising given the increased economic activity across the globe and the lack of huge negative catalysts for the markets, at least at this time. Thanks to this, one would assume that mining firms would be on the mend after their disastrous 2011, and would be among the top performers in the markets. However, this appears to be one case in which the broad focus of a fund has severely hurt its returns when compared to its more specialized peers (read Three Commodity ETFs That Have Not Surged).

So far in 2012, XME is actually one of the worst performing ETFs in the materials sector, with only some of the gold mining funds matching the SPDR product in terms of lackluster performance. This also represents a sharp departure from the trailing one year period in which XME performed pretty much in-line with its more specialized peers in the space, as most had fallen by at least 20% thanks to ongoing economic woes across the globe.

 Now, many of XME’s counterparts are decidedly leaving the popular SPDR fund in the dust, suggesting that new leadership could be in the mining and basic materials space as we head further into 2012. In light of this, investors may want to consider cycling out of the broadly focused XME and into the following four specific funds instead. These funds all had terrible 2011s but are up double digits so far in 2012, far outpacing XME and many of the broad basic materials industry products as well (see Is USCI The Best Commodity ETF?).

While there is no telling if this trend will continue, investors have to be encouraged by the recent economic developments and how this could impact ETFs in this space going forward. With that being said, when things go bad this specialized mining segment is among the worst places to be; all four of the funds on this list lost more than 40% in the 2011 calendar year.

Yet, with that being said, the strong performance figures have to be intriguing to many, and last year’s losses could imply that there are significant values to be had, suggesting now could be the time for these basic materials ETFs:  

Market Vectors Rare Earth/Strategic Metals ETF (REMX)

For investors seeking a play on a vital but tiny segment of the mining industry, REMX could be an interesting pick. The fund is up 15.3% so far this year, coming back strong after 2011’s 41.8% loss. REMX tracks about 30 companies that mine these metals which go into everything from weapons and jet engines, to flat-panel TVs and hybrid cars.

As a result, these companies are growing in importance to the world economy, especially in high tech industries. Obviously, this is a recipe for high levels of volatility a factor only multiplied by the product’s focus on mid (30%) and small cap (42%) securities (read Time To Buy The Rare Earth Metals ETF?).

Global X Uranium ETF (URA)

Thanks to Fukushima, URA had a terrible 2011, falling by almost 61% on the year. However, the fund has come roaring back in 2012, adding almost 20.3% so far this year. As a result, this product could be an interesting pick for intrepid investors seeking to make a concentrated play on the uranium mining industry.

The fund holds 20 securities in its basket, putting a heavy focus on American, Australian, and Canadian micro and mid cap firms. Top holdings include Cameco (CCJ) and Paladin Energy (PALAF) which make up 21.4% and 16.9% of the product, respectively (read Japan ETFs, One Year After Fukshima Disaster).

Global X Lithium ETF (LIT)

While LIT hasn’t gained as much as some on this list, it is up ‘just’ 16.9% so far this year, it has also come back strongly after its -39.3% performance in 2011. The fund also isn’t a pure mining fund as it looks to   also invest in companies that are engaged in lithium battery development as well.

This factor can make the fund less dependent on the lithium mining industry although the rest of the exposure often filters into high risk tech names instead. Additionally, it should be noted that none of the fund is in large cap securities; a majority is in mid caps while micro cap companies account for another 41% of assets (see Three ETFs For An Iranian Crisis).

Global X Aluminum ETF (ALUM)

Unarguably the least ‘sexy’ of the list, this product tracking companies in the aluminum industry is on a tear so far in 2012. The fund has gained about 15.2% this year, although it lost about 41.2% in 2011, suggesting that it still has a long way to go in order to break even for the previous 52 week period. The ETF has 23 securities in its basket, suggesting high levels of concentration too.

However, the fund is quite spread out from an individual country perspective as four nations—U.S., China, Japan, and the UK—account for at least 14% of total assets, while another nine countries also receive an allocation. Like many products on the list, pint sized companies dominate although in this case large caps do account for roughly one-third of total assets.  

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Author is long LIT.

 
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