REMX: Question & AnswerBrandon Rakszawski, Senior ETF Product ManagerSeptember 30, 2021
Rare earth and strategic metals have increasingly come into focus as demand has risen in recent years, corresponding with the increasing momentum behind the global energy transition toward a more sustainable, low carbon world. Despite this attention and demand, there exist few clear-cut public investment opportunities to access upstream exposure to these metals. VanEck Rare Earth/Strategic Metals ETF (REMX®) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® Global Rare Earth/Strategic Metals Index (MVREMXTR), which is intended to track the overall performance of companies involved in producing, refining, and recycling of rare earth and strategic metals and minerals. This blog is intended to answer frequently asked questions on rare earth and strategic metals and VanEck’s Rare Earth/Strategic Metals ETF (REMX).
Q: What are Rare Earth and Strategic Metals?
A: Rare earth elements (REEs) are a group of 17 elements composed of scandium, yttrium, and the 15 lanthanides. In addition to REEs, many investors are interested in other strategic or critical metals such as lithium, cobalt and molybdenum. These REEs and strategic metals have been used in many of the technological innovations of the past several decades and are expected to contribute to the innovations of tomorrow.
Although the name implies scarcity, REEs aren’t all that rare. Cerium, for example, is actually more common than copper. However, many REEs do not always occur in quantities that are commercially viable to mine.
REMX’s index provider, MV Index Solutions GmbH, currently defines rare earth and strategic metals as follows:
Strategic Metals Rare Earth Elements Antimony Manganese Cerium Terbium Arsenic Molybdenum Dysprosium Thulium Beryllium Niobium = Columbium Erbium Ytterbium Bismuth Rhenium Europium Yttrium Cadmium Selenium Gadolinium Chromium Strontium Holmium Cobalt Tantalum Lanthanum Gallium Tellurium Lutetium Germanium Thallium Neodymium Hafnium Titanium Praseodymium Indium Tungsten Promethium Lithium Vanadium Samarium Magnesium Zircon and Zirconium Scandium
Source: MV Index Solutions GmbH
Q: How are Rare Earth and Strategic Metals Used?
A: REEs and strategic metals have been increasingly used in high tech applications linked to defense or the transition to a low carbon world, among others. These uses have pushed demand for many of these metals higher in recent years and current trends indicate that demand may only increase.
Common Uses for Rare Earth and Strategic Metals
Rare Earths Various parts of electric and hybrid vehicles; air conditioners; wind power generators; fluorescent lights; plasma screens; portable computers; handheld electronic devices Lithium Electric and hybrid vehicle batteries Molybdenum Missile and aircraft parts; petroleum refining; filament material; ultra-high strength steels Titanium Aerospace jet engines, missiles and space crafts; chemical industrial process; medical prosthetics; dental instruments and implants; mobile phones Cobalt Surgical instruments; cutting tools and drills used in metal-working and mining; medical prosthetics; batteries Tungsten Lightbulb filaments; television tubes; X-ray tubes; super alloys; cutting tools and drills Manganese Disposable dry cells and batteries; stainless steels; aluminum alloys Gallium Semiconductors and LED lights Chromium Jet engines and gas turbines; cookware and cutlery; magnetic tape used in audio recording; blast furnaces and cement kilns Tantalum Electronic components; metalworking equipment; jet engine components; chemical process equipment, nuclear reactors; missile parts Germanium Semiconductor material; fiber optic systems and infrared optics; solar electric applications Indium LCD television displays; LED lights; solar cells
Q: How Can Investors Access an Investment in These Metals?
A: Physical investment in these metals is not realistic, but there are several futures contracts offering derivative exposure to a subset of these metals such as lithium and cobalt. Futures exposure can be complicated and come with a set of risks unique to futures market structure, such as contango and backwardation. Another way to access this space is through an equity investment in the companies that are involved in the extraction and processing of these metals. Their share price is influenced by the supply and demand dynamics that also influence metals prices. REMX provides global exposure to companies involved in producing, refining and recycling rare earth and strategic metals.
Q: What are the Risks of Investing in these Metals?
A: As a commodity, rare earth and strategic metals are heavily influenced by supply and demand trends. As such, the metals and companies involved in extracting and processing them can be cyclical in nature. This segment of the market has exhibited a high level of volatility, historically. Additionally, because many governments classify a large portion of these metals as “critical,” investing in them can be subject to geopolitical risks. One clear risk is exposure to China. China dominates the REEs market, and changes to their production processes and policies have had an outsized impact on the supply chain globally.
Q: How Much Influence Does China have on the Market?
A: It is well documented that China dominates the production of REEs and has become more and more involved in the fabrication of products that contain REEs, such as magnets. Their grip on the supply chain has prompted governments to develop plans to reduce their dependency on China. In 2018, the U.S. Department of Defense issued a report stating: “With increased offshoring of manufacturing, many companies have excised their process engineering capabilities, further reducing technical innovation and deterring future investment in next generation manufacturing…these effects jeopardize the ability of America’s manufacturing base to supply innovative products and skilled workers to the industrial base, threatening capabilities needed for national security.” REMX has often had exposure to Chinese companies in excess of 40% of its assets and much of that exposure is to onshore A-share listings available via the Hong Kong Stock Connect program. Investors should be aware of China’s important role in this market as well as the risks that come with it.
Q: What Metals Exposure is Prevalent in REMX?
A: Because many rare earth and strategic metals are produced in combination with a wide range of other metals, including widely mined precious and base metals, it is difficult to quantify the portfolio level exposure to each individual metal in REMX. Many of REMX’s portfolio companies have broad exposure to more than one rare earth and/or strategic metal, but several metals have had prominent exposure in recent years. REEs, lithium, cobalt, titanium, tungsten, and molybdenum have all been common exposures within REMX’s broader rare earth and strategic metals portfolio.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of 3rd party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
An investment in the Fund may be subject to risks which include, among others, investing in rare earth and strategic metals companies, regulatory action and changes in governments, Asian and Chinese issuers, investing through Stock Connect, Australian issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, basic materials sector, mining industry, small- and medium-capitalization companies, cash transactions, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, issuer-specific changes, non-diversified and concentration risks, all of which may adversely affect the Fund. Investing in Chinese issuers involves risks which include, among others, lack of liquidity and price volatility, currency devaluations and exchange rate fluctuations, intervention by the Chinese government, nationalization or expropriation, limitations on the use of brokers, and trade limitations, all of which may adversely affect the Fund. Investments made through Shanghai-Hong Kong Stock Connect are subject to trading, clearance and settlement procedures that are untested in the People’s Republic of China (PRC), which could pose risks to the Fund. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. Small- and medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
Authored byBrandon Rakszawski
Senior ETF Product Manager