World's First Lithium ETF Index Fund TNR.v, ILC.v, WLC.v, SQM, FMC, RM.v, CLQ.v

It's only a matter of time, no?

For laymens, ETF (Exchange Traded Funds) have grown leaps and bounds because of smaller investor's need for diversification. Diversification, is explained below.

Diversification in finance means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted averagerisk of its constituent assets, often less risk than the least risky of its constituents.^[1]. Therefore, any risk-averse investor will diversify to at least some extent, with more risk-averse investors diversifying more completely than less risk-averse investors. Diversification is one of two general techniques for reducing investment risk. The other is hedging. Diversification relies on the lack of a tight positive relationship among the assets' returns, and works even when correlations are near zero or somewhat positive. Hedging relies on negative correlation among assets, or shorting assets with positive correlation.

It is important to remember that diversification only works because you reduce investment in each individual asset. If you start with $10,000 in one stock and put $10,000 in another stock, you have more risk, not less. Diversification requires you to sell $5,000 of the first stock to put in the second. Then you will have less risk. Hedging, in contrast, reduces your risk without selling any of your original position^[2].

The risk reduction from diversification does not mean anyone else has to take more risk. If person A owns $10,000 of one stock and person B owns $10,000 of another, both A and B will reduce their risk if they exchange $5,000 of the two stocks, so each now has a more diversified portfolio^[3].

When you invest in a single equity, say Lithium, you face systematic risk in addition to the company's operational risk. This is mismanagement, errors in decision makings, competition, etc. Systematic risk, on the other hand, is the risk of an entire financial system meltdown - something you can't diversify away entirely.

The CAPM (Capital Asset Pricing Model) strong supports buying the market - but for a typical investor how is it possible to know the entire market?

Enter the ETF.

ETF attempts to replicate the exact market or sector the investors are trying to buy into.

One of the other longer running index so far in this emerging industry of Lithium is Byron's Lithium Index.

It includes some of our favorite equities here at Mining 101.

Western Lithium Corp (WLC.v) - trading, no official deals yet, possibly with US government?

International Lithium (ILC.v) - soon to IPO, no official deals yet

Canada Lithium (CLQ.v) - offtake + marketing deal with Mitsui

Galaxy Minerals ASX - already bought by Mitsubishi / Creat Private Equity group China

Lithium Americas (LAC.to) - deal through Magna / Mitsubishi

Lithium One - deal with Korea Resources

New World Resources - Bolivia. Difficult to work and people want Uyuni.

Salares Lithium - M&A deal with Talison Minerals (one of largest lithium spodumene miners from ASX)

Orocobre Limited - recently listed on TSX with a large $20 million financing, JV deal with Toyota.

As you can see, the non bolded ones are lithium companies already with a JV partner.

There's only a handful of solid lithium developers yet to find a JV or strategic partner - rest assured WLC, ILC, and NW will have some reasonable deals soon, given the way this market has moved so far.

Global X is an interesting index to keep watch on.

Global X Lithium ETF (NYSE:LIT) was listed for trading last Friday (7/23/10). The new ETF tracks the Solactive Global Lithium Index, which is designed to reflect performance of the largest and most liquid lithium battery producing and mining and refining companies in the world. It is not a pure play on lithium, but it’s probably as close as we will get for quite a while.

According to the press release, the basket of lithium-related equities will give investors access to the complete lithium value chain, from mining and refining through lithium battery production. The initial allocations have 51% of the index in lithium battery manufacturers, while 49% consists of lithium mining and refining companies. There are no industry allocations targeted toward pharmaceuticals based on lithium.

The LIT summary page indicates an expense ratio of 0.75% and the fact sheet (pdf) pegs the number of holdings at 20. The five largest are Sociedad Quimica Minera ADR (SQM) 20.2%, FMC Corp (FMC) 16.7%, Rockwood Holdings (ROC) 7.9%, Advanced Battery Technologies (ABAT) 4.9%, and Ener1 (HEV) 4.7%. Lithium production appears to be a small portion of the operations of the largest holdings, which are primarily fertilizer and chemical firms. However, they are the largest players in the segment, making their inclusion appropriate.

The top five country allocations are US 49%, Chile 20%, Japan 10%, Canada 6%, France 5%. Lithium, the lightest metal, is used extensively in batteries and is referred to as a “green” commodity due to its ties to renewable energy. As such, there was a large amount of chatter leading up to the launch date. Carolyn Cui’s Wall Street Journal article (New ETF Charges Up a Niche) of July 18 further fueled the anticipated arrival of this new ETF.

Initial trading activity has been quite heavy for a new product. Let’s just hope that investors understand what they are buying and won’t be disappointed to learn that the fund will not track the price of lithium.