What's Behind The Surge In Lithium ETF (LIT)?

The fate of the metal lithium is often associated with the electric carmaker Tesla Motors (NASDAQ:TSLA) . This is because this material is used in making lithium-ion batteries that power electric cars. However, the path of the duo has gone in two different directions this year, with Tesla suffering from safety recalls and the related repair costs while lithium surging on strong demand.

Upbeat production Outlook by Tesla

However, Tesla remains upbeat on future production. Tesla has decided to expedite its production to 500,000 units by 2018, rather than 2020 as planned earlier. In the second quarter of 2016, Tesla expects to deliver 20,000 vehicles, representing a 30% increase sequentially. Notably, Tesla is witnessing a surge in demand for Model 3 cars. Higher car production will invariably drive up the demand for lithium.

Usage of Lithium in High-Tech Gadgets

Lithium-ion battery is also used in mobile phones, smartphones, laptops, tablets etc. Though global smatphones sales are expected to slow down in 2016, the scope is still there in the emerging nations, which are still under-penetrated. Plus, there is demand from other gadgets like laptops and tablets. All these have kept the need for Lithium in fine fettle.

Goldman Sachs Group Inc (NYSE:GS). expects lithium demand to rise threefold by 2025 to 570,000 tons, thanks to smartphone and electric-car applications (read: Forget Big Tech, Focus on These ETFs Instead).

China: Yet Another Driver

China, which is focused on lowering greenhouse gas emission and turning environmentally friendly, is likely to opt for more lithium batteries for electric buses and other vehicles. NextEV, a Chinese company, disclosed its plans to launch its first electric car in 2017, as per Wall Street Journal(read: Eco-Friendly ETFs to Commemorate World Environment Day).

Market Impact

At present, there is only one way – Global X Lithium ETF (AX:LIT) – to target this space from a global perspective. The fund hit a 52-week high on June 7, which is 74.1% higher than its 52-week low price.

The fundhas a positive weighted alpha of 20.00. A positive weighted alpha hints at more gains.However, investors should note that LIT has a relative strength index of 77.26 indicating that the metal is to enter the overbought territory.

We have described LIT in greater detail below (read: Play Surging Electric Car Demand with the Lithium ETF):

Lithium ETF in Focus

The product looks to give global exposure to the broad range of firms engaged in the mining of lithium, or the development of lithium batteries. The product tracks the Solactive Global Lithium Index giving access to the largest and most-liquid 25 firms around the globe.

The fund has amassed about $73.5 million in its asset base and trades in light volume of nearly 70,000 shares per day. This increases the total cost for the fund in the form of a wide bid/ask spread beyond the expense ratio of 0.77%.

American firms dominate the portfolio with 34% share while Taiwan and South Korea round off to the next two spots with a double-digit allocation each. From a sector look, the ETF is heavy on materials with 50.7% share, followed by industrials (19.3%) and consumer discretionary (16.5%).

The fund is highly concentrated on two firms – FMC Corp (NYSE:FMC) and Quimica Y Minera Chil-SP – which collectively make up for over 30% of total assets. Other firms hold less than 8% in the basket. LIT is up 26.7% so far this year (as of June 7, 2016).