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Dion's Weekly ETF Blog Wrap

Rare-Earth ETF on Shaky Ground

Published 7/05/2011 5:24 p.m. EDT

When Van Eck launched the Market Vectors Rare Earth/Strategic Metals ETF (REMX) in October 2010, the timing was impeccable. In an industry where shrewdly launched, narrowly focused funds can help small issuers compete with ETF giants, a fund like REMX is a shining star. REMX's rapid ascent -- the net asset value of the equity-backed ETF gained more than 8% year to date -- may soon become another example of a fund whose success hinges on politics.

Today, more than 18 months after the World Trade Organization agreed to investigate China's quotas, export duties and license requirements, a panel ruled that the country's restrictions on exports of nine raw materials violate global rules. As the largest producer of the so-called rare-earths metals, China has been putting the squeeze on foreign manufacturers while giving domestic manufacturers an edge.

Not to be left out, the ETF industry looked for an angle, and Van Eck responded with REMX, a global equity fund designed to track publicly traded companies that are primarily engaged in a variety of activities that are related to the mining, refining and manufacturing of rare-earth and strategic metals. The largest two countries represented in REMX's underlying portfolio are the U.S. and Canada, whose firms have been affected by the restrictions.

If and when enforcement of WTO rulings aid producers outside of China, some REMX firms in the U.S. and Canada may be able to ramp up manufacturing. Today, the ruling seemed to provide for choppy trading: Molycorp (MCP) closed more than 1% lower but bounced in after-hours trading. After a choppy session, another REMX component, RTI International Metals (RTI), ended higher. REMX itself had an extremely volatile opening and barely finished the day in positive territory.

More than 11% of REMX's holdings are Chinese firms that have been benefiting from trade restrictions, and Van Eck certainly seemed aware of potential hang-ups. The small type at the bottom of REMX's fact sheet states, "Investors should be willing to accept a high degree of volatility and the potential of significant loss. China is currently the primary source of rare earth/ strategic metals; a ban on the export of rare earth metals, or alternatively a reversal of China's policies on export limits, could have a significant impact on industries around the globe."

For now, ETF investors should keep a close eye on REMX's composition -- and on any subsequent changes -- to see how the latest WTO ruling affects the ETF.

At the time of publication, Dion Money Management had no positions in stocks mentioned.

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