The Long-Term View On Lithium

After surging more than 64 percent last year to rank as one of 2017's best-performing non-leveraged exchange-traded funds, the Global X Lithium & Battery Tech ETF LIT is down more than 8 percent year-to-date.

The $1 billion LIT follows the Solactive Global Lithium Index and “invests in the full lithium cycle, from mining and refining the metal, through battery production,” according to Global X.

While there is a “full lithium cycle,” much of the demand tied to the commodity comes from electric vehicles that are powered by lithium-ion batteries. Electric demand and purchases are booming, but that trend is still in its nascent stages, underscoring the point that lithium investing, while volatile, is also a long-term idea.

The Electric Vehicle Thesis

“There are a number of factors that will influence the adoption of electric vehicles (EVs), including legislation, charging infrastructure, fuel cost, and tax incentives,” said Markit in a recent note. “The most important issue is the battery, in terms of both cost and efficiency. The lithium-ion battery (LIB) is the most important cost component of an electric car and its cost has dropped by 80 percent since 2010. However, one cost that has not dropped is that of raw materials such as lithium.”

LIT holds 35 stocks. Notably, the sector exposure isn't entirely dedicated to materials stocks. That sector is 64 percent of the fund's weight, but LIT features consumer discretionary, industrial and technology exposure, too. Overall, the ETF has ample leverage to favorable demand trends in the burgeoning lithium cycle.

“As the industry slowly wakes up, we are seeing investments that will bring new lithium capacity on stream,” said Markit. “Developing lithium mining projects can take as long as 10 years. To overcome delays, a number of junior lithium producers are finding partners in the industry with available expertise and funding, both of which are crucial to developing a successful project.”

Rising Lithium Demand

Lithium demand is expected to surge in the coming years.

“Our base case scenario is that total lithium demand will grow at 14 percent per year by 2025, when it will reach more than 600,000 metric tons (mt),” said Markit. “Our high case scenario assumes an 8 percent penetration of EV by 2025 instead of 4 percent, creating an increase of 18 percent per year in lithium demand.”

Still, LIT is a tough hold for some investors. The ETF's underlying index had annualized volatility of 20 percent through the end of 2017 and LIT itself has a standard deviation of 58.7 percent, or more than five times the same metric on the S&P 500.

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