Stoxx launches Global Rare Earth Index as high-tech demand for rare metals soars
Amid a surge in demand from investors for exposure to niche infrastructure themes, index provider Stoxx has launched the Global Rare Earth Index, which offers enhanced exposure to rare earths used in the manufacture of a multitude of high-tech products from iPhones to hybrid cars, wind turbines and batteries.
“The topic of rare earth usage in high technology has been a widely discussed trend in the investment industry,” says Konrad Sippel, executive director and head of sell side at Stoxx in Zurich.
The index universe screens for companies that generate at least 30% of their revenues in the rare earth sector globally, using independent research partner Datamonitor Group. Only those companies with average daily trading value of at least $1 million are eligible for inclusion.
“There are a number of opportunities for index providers to exploit. It is clear that whoever is benefiting from the production of these high-tech products will also benefit from investing in them,” says Sippel.
With a risk-return ratio of 2.58, almost double the existing BNP Paribas Global Rare Earth benchmark (1.46), the index covers companies with operations involving exploration, extraction, transport, processing and any other business process involving 17 rare-earth elements (scandium, yttrium, lanthanum, lutetium, ytterbium, thulium, erbium, holmium, dysprosium, terbium, gadolinium, europium, samarium, promethium, neodymium, praseodymium and cerium).
The term ‘rare earth’ is derived from the fact that these elements are rarely found in high concentrations in a single reserve. They are primarily mined in China at present.
“China controls a significant proportion of the rare earth reserves that are currently being utilised,” says Seb Beloe, head of SRI Research at Henderson Global Investors in London. “There are other sources, but they are of higher cost and have not been developed in the way that China’s reserves have. There is a lot of work being done trying to substitute these rare earth metals with alternatives so people are not subject to the restrictions imposed by the Chinese reserves.”
“Our range of theme indexes is likely to expand,” adds Sippel. “There is an investment case behind the story, and I think we will see more of these types of index that focus on highly specific areas of business.”
Weighted by free-float-adjusted market capitalisation, the index currently consists of 14 components and is rebalanced quarterly. A cap of 20% is applied to prevent single constituents from dominating.
While Sippel says the concept of risk control is easily replicable on the index, he says it will probably attract interest from investors who are keen on getting complete exposure to such a niche area.
“The price of rare earths has massively increased, and in the short to medium term there is going to be a lot of demand for them,” says Beloe.
“In the medium to long term this is flawed, because people will just switch into alternative materials and find other ways of delivering performance without having to rely on rare earth metals,” he adds.