Finally!  MarketVectors launched a rare earth elements ETF.  The new fund’s ticker is REMX and just started trading on 12/27/2010.  Not sure what  a rare earth element is or why I am excited?  Rare earth elements (REE) are a collection of 17 chemical elements in the periodic table. These elements are the 15 lanthanides along with scandium and yttrium. Why are these elements important? A quote from a Financial Times article it rather succinct in saying:

“…rare earth elements are the most important substances you have never heard of, vital for applications from hybrid cars to guided missiles. Arguably as important as oil to a modern economy or military force, their supply is far more concentrated. While the Organization of the Petroleum Exporting Countries can make the world shudder with its 40 per cent of crude supply, China has 98 per cent of REE production, leading the late Deng Xiaoping to remark that “he Middle East has oil, but China has rare earths.”

Fund details

The fund has large concentrations of investments in Australian, Canadian, U.S. and Chinese companies.  The fund looks to invest in companies that produce, refine, mine or recycle rare earth elements.  Approximately 50% of the portfolio is invested in the top 10 holdings.  The top holding is Lynas Corp of Australia who claims to have one of the top rare earth mines.

Curse and Blessing

In the quote above from the Financial Times it is clear that China has a strangle hold on the REE market.  Not only does China have their own REE mines within its borders but China has also been on a REE company buying spree.  Even the top holding in REMX, Lynas Corp. of Australia, has seen significant investments from China.  China being in the portfolio is both a curse and a blessing.  China is a blessing because China has a stranglehold on the REE market.  China is a curse because China has a stranglehold on the REE market.  Yes those are the same sentence.

Good with the bad

The real investment opportunities are going to be in the non-Chinese REE companies because they are scrambling to establish new non-Chinese sources of these critical elements.  There are some great companies in this portfolio but also some of the Chinese companies that are following their countries’ export restrictions.

Careful

REE are highly volatile and many are screaming about a bubble in the REE market.  Bubble being an overly used term to refer to anything that has gone up .  HERE is an article that may help shed some light on the issues around REEs.  Another note of caution about this fund is that the fund is new and does not have much in terms of assets in the fund.  I typically do not invest in ETFs that have low trading volume and/or a low level of assets(less than $50 million.  So, put this one on your radar to watch.  Or, if you have some money you want to put into a high risk investment with high potential reward then consider adding some REE to your portfolio.  For now if you want some exposure while this fund ramps up look at investing in one or two of the fund’s constituents.

Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. This article does not constitute an offer of sales of any securities. Henry L. Becker, Jr.  and/or Sustainable Investment Strategies, LLC holds no positions in ticker symbol REMX – Market Vectors Rare Earth/Strategic Metals ETF. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

We all like free stuff. We have been busy bees compiling research to make some informed decisions for our 2010 strategy. Here are a few pieces of research we have prepared which we are sharing as our New Years gift to our blog readers.  In the future you can find both under the Tools tab above.

Risk Ratios Analysis CLICK HERE

This analysis covers about 60 ETFs and will be updated monhtly. This spreadsheet takes a look at downside risk, Sortino ratios, volatility skewness and for those of you still stuck on modern portfolio theory we have thrown in standard deviation. Our assumptions for the spreadsheet is a minimum acceptable return (MAR) of 6% annually and a risk free rate of return of 1%. For most of the ETFs we based the stats on 36 months. The analysis is through November 2009. If you are scratching your head asking what are these stats, there are definitions at the bottom of this page.

People look for many scenarios in the numbers. One scenario I like is high volatility skewness, high mean monthly return, high Sortino, and low downside risk. I will give you a hint iShares Global Consumer Staples. Enjoy!

World Leading Exporters Economic Analysis CLICK HERE

Updated annually this file gives details such as Export Rank, Import Rank, External Debt, Current Account Balance, Literacy Rate, GDP, Per Capita GDP, Economic Freedom Rank, Financial Development Rank, Human Development Rank, LIfe Expectancy, and G20 member status.  Why all this?  All of these are important details when selecting a country specific ETF.

Definitions for the Risk Ratio Analysis

Downside Risk – is the annualized standard deviation of returns below a target return. This is a more useful statistic than standard deviation that looks at both good returns and bad returns. The lower the better.

Sortino Ratio – measures the risk adjusted return of an investment asset, portfolio or strategy. It is a modification of the Sharpe Ratio but penalizes only those returns falling below a user-specified target, or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. The higher the better. Sortino’s are negative in quite a few as we have gone through extraordinary losses in the time frame analyzed.

Volatility Skewness – measures the ratio of a distribution’s percentage of total variance from returns above the mean, to the percentage of the distribution’s total variance from returns below the mean. The higher the better.

Standard Deviation – In simple terms, it shows how much variation there is from the “average” (mean). OUr standard deviation is of monthly returns not annual.

Mean Monthly Return – is the average return for the last 36 (or since inception) months. The higher the better.