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Rare Earth ETF Investing - Managing Risk With Your Investments

By Edited Dec 19, 2013 0 0

One of the hottest sectors in investing in late 2010 was the rare earth sector. Many rare earth metal companies shot up by leaps and bounds and in turn rare earth EFT investing became a possibility. As 2010 rolled over to 2011 the rare earth metals sector is still hot but as many hot industries rise quickly they also tend to fall quickly as well.

Rare Earth ETF Investments

One of the oldest adages in investing is to diversify greatly and never put all your eggs in one basket. You want to own a little bit of the domestic sector, a little bit of the foreign sector and within these sectors you want to own some small companies, medium sized companies as well as large companies.

Other disciplined investors also like to diversify their holding by holding both stocks and options, calls, puts, ETFs, mutual funds, and currencies. Within each major sector an investor can even diversify within the types of companies. For instance a person looking to invest in gold may want to buy the stocks of a number of different gold companies or an investor in copper may want to buy many different companies that mine of copper.

As you continue to diversify you theoretically are lowering your risk profile because you are spreading your risk out among many different companies. When one succeeds you will be more likely to be holding it and when one fails or falls on hard times your investment portfolio is less likely to take a large hit for holding it.

ETF Investments Make Diversification Easy

The costs of buying so many stocks and investments however have made ETF investing very attractive in recent years. ETFs are exchange traded funds and in summary they work in much the same way as a person buying up the stocks of many different companies in a sector but in one convenient and cheap package.

Investing in ETFs is fine and easy for most of the usual sectors however specialty sectors like rare earth metals fly under the radar and only when they heat up is interest high enough to really form any major ETFs for public investment portfolios.

China And Rare Earth Metal Mining Companies

In late 2010 the rare earth metals companies began to get really hot when it became increasingly clear how much of a monopoly China had on the rare earth metals market. Although many of the rare earths like Scandium, Lutetium, Molybdenum, and the other 49 elements are easily found across the globe China was the catalyst in 2010 for an explosion in the price of rare earth metals in general when they cut their export quota to the rest of the world in half. This is significant when more than 90 percent of all rare earth metals are produced in China.

Immediately after the prices of these metals started skyrocketing the stock prices of many rare earth metal miners started increasing significantly as well. Many of the major rare earth miners which are publically traded are not well know but companies like China Rare Earth Holdings, Molycorp, and Rare Element Resources (just to name a few) increased significantly.

As is typical in the investment world these hot trends in the stock market has resulted in new ETF funds being created to capitalize on the growing investor appetite for rare earth metal ETFs. The first publically traded rare earth ETF to hit the market only occurred on October 28, 2010 when the Van Eck Global Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) hit the market for trading.

Is The Rare Earth Sector Topped Out?

Many investors tend to feel that when ETFs for niche markets like these are created market tops are already in but there is no denying that the price of many rare earth metals has risen dramatically due to the sudden shortage of supply. Unfortunately what has kept many domestic metals mining companies from mining more rare earth metals was the cost to do so but now with the price rising so far so fast many miners may jump into the game or will step up their production. This will of course lead to a stabilization of prices at a more natural level which is inevitable due to the fact that many of these metals are not rare at all – they are simply not mined in volumes that other metals like copper, iron, and gold are.

If however you have an appetite for risk in your investment portfolio you may want to consider diversifying into REMX the current rare earth ETF that has pioneered the market. Diversification is key and this ETF does provide some allocation to many different rare earth mining companies and it certainly does give you diversification away from the major commodities like oil, natural gas, and others.

For now a major selling point of this ETF is the perceived shortage of rare earths since China's 2010 announcement and the expected increase in demand for rare earth elements in many of tomorrow's technological products. The golden rule with investing is to not put all your eggs in one basket but you should dip your toes into many baskets instead. This may be a good time to consider dipping into this emerging sector through the first ETF's on the market.



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