The month of July brought a handful of new and interesting exchange-traded funds (ETFs) to the market, but the one getting the most press is the Global X Lithium ETF (NYSE:LIT). Because the ETF is the first to concentrate on the niche commodity, it has investors that have long been searching for a way to play the increasing demand for lithium very excited. Lithium is not your typical fuel source, such as oil and coal, but it can be used to generate power in lithium-ion batteries that fuel everything from a cell phone to an automobile. Lithium is a highly reactive metal that currently is not traded on any commodity exchanges and therefore the new ETF is one of the only ways for investors to profit from higher lithium prices and demand.
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Due to the small number of lithium stock plays available, the ETF is heavily weighted in a few big names. The top three holdings are all lithium mining companies, and they make up a total of 45%. Half of the ETF is invested in mining and the other half in battery-related companies. The top holding is the Chemical & Mining Company of Chile (NYSE:SQM) with 20% allocation, followed by FMC Corp (NYSE:FMC) at 17%, and Rockwood Holdings (NYSE:ROC) comes in at 8%.
Chemical & Mining Company of Chile is the largest lithium producer in the world, and is based close to Bolivia, which is the "Saudi Arabia of lithium." Even though SQM produces a large amount of lithium, the stock is not a pure play on the sector because the company has exposure to other areas in the chemical industry, such as fertilizers and iodine. The stock has struggled this year with the entire agricultural chemical sector, but a boost in the sector and the lithium story have the stock moving once again.
Rockwood Holdings is the number two lithium producer, and considered a specialty chemicals firm. Its most recent earnings report surprised everyone with a much better than expected number, however the company stated it is operating with a "cautious outlook" in the next quarter. Similar to SQM, ROC is not a pure play lithium company as it is made up of 10 separate divisions.
FMC Corp comes in at number three among lithium producers, and also recently reported earnings that beat the street's estimate. The net income fell from the prior year due to restructuring charges, however earnings per share ex-items saw a jump of over 35%. FMC is interesting because it is an economically sensitive stock that trades at a forward P/E of only 11.9. If the global economy continues to rebound and the lithium story plays out, look for FMC to continue its already strong 2010.
The Bottom Line
Keep in mind that lithium is a commodity, but at the same time it offers a clean alternative to fossil fuels in the future. Think Chevy Volt or the Tesla electronic car that uses thousands of small lithium-ion batteries, and do not forget about the millions of handheld devices that use lithium-ion batteries. This is a story that is quickly gaining momentum and could be one of the mega-trends of the next decade. (To learn more, check out Clean Or Green Technology Investing.)
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