Up nearly 21% year-to-date, the Global X Lithium ETF (NYSEArca: LIT) has quietly been one of this year’s best-performing equity-based commodities exchange traded funds, but some market observers believe the lithium trade is primed to cool off.
LIT tracks a diversified group of companies involved in the “full lithium cycle,” from mining and refining the metal through battery production. Lithium is utilized in batteries for their high charge density, or longer lasting life.
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One of the marquee names in LIT is Tesla (NasdaqGS: TSLA), a stock that has struggled this year, making the ETF’s performance all the more impressive.
“Lithium demonstrates all the characteristics of a commodity bubble: 1) what appears to be a compelling bull case, which actually focuses solely on demand and totally ignores the supply side of the equation; 2) an expanding supply side with a total lack of barriers to entry; and 3) technological innovations that could potentially halve costs and boost the reserve base,” according to an AB note posted by Dimitra DeFotis of Barron’s.
Due to their close ties with the commodities market, the materials sector are susceptible to cyclical demand and volatility in raw material and energy prices. While the sector’s sensitivity to business cycles can expose investors to greater risks, the area may also offer attractive returns during periods of strong growth.
With the economy recovery maturing, the materials sector, which is closely tied to the prices of raw materials, have traditionally done well as inflation rises and late-cycle economic expansions help support demand
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“Perhaps the best illustration of that lithium frenzy is Tesla’s newly-built battery lithium-ion factory. Tesla is already the largest consumer of lithium ion on the planet and is set to become the largest producer of lithium-ion batteries, by far. The company’s new factory is huge. So gigantic that BGR, a leading online website for mobiles and consumer electronics referenced it as “mind-blowing”. The factory was built (and is still not fully complete) to meet Tesla’s target to manufacture 500,000 electric cars per year by 2020,” according to the AB note featured in Barron’s.
Global X Lithium ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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