The New Global X Lithium ETF Could Become The Commodity Of The Future (LIT, USO, UNG)

“Bolivian magnate R. Marcelo Claure had been looking for a way to make a broad-based bet on lithium. A hedge fund in which he invests found him one. The fund, MC Capital Advisors, this year turned to a company that creates exchange-traded funds. The result was Global X Lithium, an ETF that tracks lithium producers and battery makers. It is expected to launch this week. MC Capital provided seed money to New York-based Global X Management Co., to start the ETF, and will receive half the ETF’s profits. Global X Lithium is an unusual case of ETF creation. But it also is part of a trend in which ETF firms are joining forces with other companies to launch funds that track obscure parts of the financial markets,” Carolyn Cui Reports From The WSJ.

“It’s harder and harder to come up with simple, obvious and good ideas,” said John Hyland, chief investment officer of U.S. Commodity Funds, which runs eight energy ETFs, including the U.S. Oil Fund (NYSE:USO) and U.S. Natural Gas Fund (NYSE:UNG). Mr. Hyland’s company is about to launch an ETF designed to track commodities whose current contract is trading at a premium to future contracts, generally a sign of tight supplies, along with long-term trends. The idea was pushed by SummerHaven Investment Management, a Connecticut investment firm, Mr. Hyland said.

Cui goes on to say, “MC Capital, along with Mr. Claure, was interested in lithium. In February, the hedge fund called Global X Management to suggest the idea of creating a lithium-related ETF. MC Capital wasn’t involved with the specifics of the index construction, and won’t have inside access to any trading information, said Guillermo Trias, a portfolio manager at the fund. “What everybody wants to achieve is to build the best and most representative index for lithium,” said Bruno del Ama, chief executive of Global X Management. He said the firm already was considering such a fund. Global X hired Structured Solutions AG to develop an index comprising about 20 companies. Mr. Claure, the Bolivian magnate, said in an email he had spent years looking for an easy way to invest in lithium. The 39-year-old is the founder of Brightstar Corp., one of the world’s largest distributors of hand-held devices, with $3 billion in revenue in 2009. His Bolivian roots got him interested in lithium, he said, because the country has one of the world’s largest deposits.”

“The highly reactive metal isn’t traded on any commodity exchange. Companies producing lithium are either multinationals where lithium accounts for only a small portion of their businesses or nascent miners where production still is years away. While lithium is commonly used in batteries for cellphones and other electronic gadgets, its brightest future appears to be in the movement toward electric cars. Tesla Motors Inc.’s Roadster runs on thousands of small lithium-ion battery cells. Lithium prices have tripled since 1999, according to Credit Suisse. Global demand for the metal is expected to more than double by the end of this decade, according to TRU Group Inc., a Toronto independent consultant specializing in lithium. Some analysts warn against the “overhype” in the lithium market,” Cui Reports.

About 50 companies were set up over the past two years to develop lithium, but more than 80% of them will never come into production due to technology challenges and costs, said Edward Anderson, president of TRU Group. Lithium also is in abundant supply, he said. Still, Mr. Claure said he sees lithium as the “commodity of the future” and will expand his investments in the industry over the next few years. Higher lithium prices, he said, also will bring in more investment to his home country.

Here are some more details from our article on the launch of the Lithium ETF below:

Global X Unveils More Details For Their Proposed Lithium ETF (LIT)

Global X has filed amendments to their initial filing for the proposed “Global X Lithium ETF.” The ETF will trade on the NYSE Arca under the symbol “LIT”. According to the prospectus the total annual fund operating expenses are to be 0.75%. The Global X Lithium ETF (“Fund”) seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Lithium Index.

The Underlying Index is free float adjusted, liquidity tested and market capitalization-weighted index that is designed to measure broad based equity market performance of global companies involved in the lithium industry, as defined by Structured Solutions AG.  As of June 30, 2010 the Underlying Index had 20 constituents, 60% of which are foreign companies.  The three largest stocks were SQM, FMC Corporation and Rockwood Holdings.  The Fund’s investment objective and Underlying Index may be changed without shareholder approval.  Shareholders will be given 60 days’ prior notice of any such change.

The Underlying Index is sponsored by an organization (“Index Provider”) that is independent of the Fund and Global X Management Company LLC, the investment adviser for the Fund (“Adviser”).  The Index Provider determines the relative weightings of the securities in the Underlying Index and publishes information regarding the market value of the Underlying Index. The Fund’s Index Provider is Structured Solutions AG.

The Adviser uses a “passive” or indexing approach to try to achieve the Fund’s investment objective. Unlike many investment companies, the Fund does not try to “beat” the Underlying Index and does not seek temporary defensive positions when markets decline or appear overvalued.

The Fund will normally invest at least 80% of its total assets in the securities of the Underlying Index and in depositary receipts based on the securities in the Underlying Index.

The Fund will use a replication strategy. A replication strategy is an indexing strategy that involves investing in the securities of the Underlying Index in approximately the same proportions as in the Underlying Index.  However, the Fund may utilize a representative sampling strategy with respect to the Underlying Index when a replication strategy might be detrimental to shareholders, such as when there are practical difficulties or substantial costs involved in compiling a portfolio of equity securities to follow the Underlying Index, in instances in which a security in the Underlying Index becomes temporarily illiquid, unavailable or less liquid, or as a result of legal restrictions or limitations (such as tax diversification requirements) that apply to the Fund but not the Underlying Index.
Correlation: Correlation is the extent to which the values of different types of investments move in tandem with one another in response to changing economic and market conditions.  An index is a theoretical financial calculation, while the Fund is an actual investment portfolio. The performance of the Fund and the Underlying Index may vary somewhat due to transaction costs, asset valuations, foreign currency valuations, market impact, corporate actions (such as mergers and spin-offs), legal restrictions or limitations, illiquid or unavailable securities, and timing variances.

The Adviser expects that, over time, the correlation between the Fund’s performance and that of the Underlying Index, before fees and expenses, will exceed 90%.  A correlation percentage of 100% would indicate perfect correlation.  If the Fund uses a replication strategy, it can be expected to have greater correlation to the Underlying Index than if it uses a representative sampling strategy.
Industry Concentration Policy: The Fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the Underlying Index is concentrated.

For the full prospectus click: HERE

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