New ETF Gambles on Electric Cars

NEW YORK (TheStreet) -- The GlobalX Lithium ETF debuted Friday to much fanfare after a writeup in The Wall Street Journal.

It's a specialized exchange traded fund, seeking to capitalize on the increase in lithium demand if electric cars proliferate and other innovations in battery technology are widely adopted. Meaningful market-share gains for electric cars will boost lithium miners and companies making lithium batteries, so the ETF allocates 50% to each category.

The world's largest lithium deposits are in South America -- with the biggest in Bolivia -- although a deposit was recently discovered in Afghanistan. But the U.S. is the largest country in the fund, at 49%, followed by Chile, at 20%, and Japan, at 10%, before the allocations get much smaller. In addition to mining companies, the ETF owns companies that make the batteries.

The individual holdings are concentrated -- not shocking given that this is very much a narrow slice of the equity market and the fund has only 20 holdings. Chilean materials company Quimica Y Minera ( SQM) has a 20% weight in the fund and FMC ( FMC) has 17%. Given how large these holdings are, it is important for anyone considering the lithium ETF to learn at least a little about each of those companies.

Quimica Y Minera has four lines of business: fertilizer, iodine, industrial chemicals and, of course, lithium. But lithium represented only 8% of sales in the company's 2009 report. That gives the company a 31% market share, so the large weighting in the fund makes sense. Quimica Y Minera is a diversified materials company, though, not a pure play.

FMC is a similar story. It has three lines of business -- industrial chemicals, agricultural products and specialty chemicals, of which lithium is a part -- but any reading I've done on the company has been in the context of discussing soda ash. The comments in FMC's 2009 report were forward-looking about the potential need for lithium and the company's recently commissioned processing plants in China and India. It seems clear that the company thinks lithium will be important for over the next 10 years, but is not significant to revenue and profits yet.

Regarding battery holdings, investors may recognize such names as Exide Technologies ( XIDE) and Ener1 ( HEV).

Given the mix of specialized mining companies and small-cap battery companies, investors should expect the fund to be a very volatile holding.

The decision to buy the lithium ETF boils down to whether the world will drive electric cars in the future. On the pro side of this argument is the need for the U.S., for political and environmental reasons, to make changes in its energy-consumption habits. On the con side is that, for this to happen, there needs to be a massive reorientation in how people think about cars -- and a massive infrastructure investment in building charging stations for these vehicles.

The fund is a bet on the future of what is not yet a crucial technology. In being early to market, GlobalX CEO Bruno del Ama acknowledged the need to meet client demand. He was also able to cite a past success with this strategy: Global X/InterBolsa FTSE Colombia 20 ETF ( GXG), which targeted stocks in turbulent Colombia and has more than doubled in value since its launch in February 2009.

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At the time of publication, Roger Nusbaum had no positions in the securities mentioned.

Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an e-mail.

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