In late October, Van Eck Global launched the first listed exchange-traded fund (ETF) in the United States – the Market Vectors Rare Earth/Strategic Metals ETF (NYSE Arca:REMX), which aims to expose investors to companies involved in the production, refining, and recycling of rare earth/strategic metals. The fund seeks to reproduce, as far as possible, the price and yield performance of the Market Vectors Rare Earth/Strategic Metals Index (Index), which enables investors to track the overall performance of listed companies in that sector. To be listed in the Index, a company must earn over 50% of its revenue from ventures in the rare earth/strategic metals space.

The Index includes both rare earths and strategic metals, a group that includes 49 elements in the periodic table. Strategic metals are utilized in applications such as jet engines, cell phones, hybrid cars, wind turbines, and steel alloys, while the subset of 17 rare earth metals are chemical elements that play a critical role in several technological products, especially in electronics.

As has been repeatedly reported, China is the world’s largest producer of rare earth metals, accounting for about 97% of the global production. However, the Index lists equities that are available to non-Chinese investors as well, which is why only offshore Chinese equities or H-shares are included in the Index. As per the latest data, the Index includes 24 companies based in eight countries. China has the fourth highest presence (14.84%) after Australia, Canada and the US.

The first day of trading saw the share prices of REMX and other rare earth companies fall in the wake of a report that said that China had called off the unofficial halt of rare earth shipments to Europe, Japan, and the US. Prices later stabilized but trading still ended at a level about 4.6% lower than at the start.

Principal Jan van Eck of Van Eck Global said, “We believe REMX offers investors balanced exposure to the sector first by including strategic metals as well as rare earths and second by including processors and recyclers, not just mining companies. An additional advantage is that the underlying index caps exposure to any company at 8%; this limit prevents any particular company from having an undue effect on the ETF.”

Van Eck has pointed out that like all investments, investing in the rare earths/strategic metals industry has its own share of risks, which include environmental concerns and geopolitical issues. Since China plays such a huge role in the industry, any policy change in China can affect the Index. The recent furor over China tightening its export quota resulted in a sharp price hike in the shares of small non-Chinese rare earth mining companies. Further, most of the rare earth companies are small or medium-sized and are highly sensitive to the availability of capital. Not to forget, share prices and metal prices can both be volatile.

Analysts are of the opinion that REMX is new and operating with an unproven methodology. The listed companies are rather risky with more promises than actual operating histories. However, trading has been active in spite of the risks involved. Analysts believe that regardless of the risks, the rare earth theme cannot be ignored and the Index is an entity worth observing.

By Anthony David

http://www.criticalstrategicmetals.com

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© 2010 Copyright Anthony David- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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