For those investors who want a slice of the lithium industry, without taking on the risks of investing in individual lithium producers, a lithium exchange-traded fund (ETF) could be an investment worth considering.
Much like other ETFs, a lithium ETF is a basket of stocks (in this case related to lithium) that can be traded on an exchange. One share in this lithium-tracking fund could help you capitalize on an emerging commodity, while also getting diversification to protect you against wild price swings.
Choosing lithium ETFs can be a challenge, especially since there are few lithium ETFs native to Canada. Below we’ll break down the risks and rewards of these hot commodity funds and introduce some lithium ETFs you might want to choose from.
What is a lithium ETF?
A lithium ETF is an investment that tracks (or seeks to surpass) the performance of a basket of lithium companies.
Many lithium ETFs are passive, meaning the fund manager seeks to replicate, but not beat, an index of lithium companies. Others you’ll find are actively managed, meaning the fund manager has chosen a segment of the lithium industry and intends to outperform it.
The underlying stocks in lithium ETFs are often mining companies. These companies are engaged in the procuring and production of various substances into a useable lithium metal, since lithium is not found naturally. These companies have numerous risks and operating costs, which make investing in them individually not for the faint of heart.
Lithium is a major ingredient in lithium-ion batteries, which has made it a hot, hot commodity. Numerous companies rely on lithium to manufacture products, including those that rely on semiconductors (such as gaming, smartphone, and computer companies) and need storage for renewable energy (such as electric vehicle, solar panel, and wind turbine companies).
Lithium prices, like those for other raw materials and metals, can experience wild swings, based entirely on supply and demand. This makes lithium stocks particularly volatile. The benefit of a lithium ETF, then, is that it can bring some stability to your investment by exposing you to a wide range of lithium companies.
Top lithium ETFs in Canada
Buying lithium ETFs in Canada can be a challenge. After all, few such ETFs exist worldwide and only one is a TSX native.
That said, Canadian investors have access to a handful of lithium ETFs. Below, we’ll briefly describe three you might want to consider.
|Lithium ETF||MER||Description||Inception Date|
|Horizons Global Lithium Producers Index ETF (TSX: HLIT)||0.75%||First Canadian lithium ETF to provide exposure to lithium mining companies||June 22, 2021|
|Global X Lithium & Battery Tech ETF (NYSE: LIT)||0.75%||U.S.-listed ETF composed of mining and tech companies that build batteries.||July 22, 2010|
|Amplify Lithium & Battery Technology ETF (NYSE: BATT)||0.59%||U.S.-listed ETF with companies from every segment of the lithium cycle.||June 4, 2018|
MER date accurate as of January 16, 2023
Note: Lithium ETFs, like other exchange-traded funds, have management expense ratios (MERs). This fee is the cost of owning the ETF and it’s expressed as an annual percentage. For instance, if your ETF has a MER of .40%, then it would cost you roughly $40 per year if you invested $10,000.
1. Horizons Global Lithium Producers Index ETF
This is currently Canada’s only lithium ETF trading on the TSX. The fund has broad exposure to lithium mining companies. A large percentage of these companies are headquartered in Australia (51%) and the United States (18.35%). But you’ll also get exposure to companies in Chile (9.9%), China (8.1%), and Canada (6.4%).
2. Global X Lithium & Battery Tech ETF
Largely considered the first lithium ETF in the world, the Global X is a U.S.-based fund with a large holding in companies that use lithium to build batteries. This would include companies that mine lithium (like Albemarle Corp), as well as companies that make lithium-ion batteries for consumer use (like Panasonic and Sony).
3. Amplify Lithium & Battery Technology ETF
Another U.S-based fund, the Amplify ETF, brings together nearly every segment of the lithium sector. This includes companies that mine and produce lithium (like Glencore) to companies that use lithium-ion batteries (like Tesla and LG).
RELATED: Top Canadian Technology ETFs
Pros of investing in lithium ETFs
- Exposure to a hot commodity. Lithium is a much-needed metal for battery production. Unless someone figures out a new battery composition that doesn’t require lithium, the lithium market could have enough demand to sustain itself for decades ahead.
- No need to choose individual lithium stocks. That’s part of the anxiety of investing, right? So many choices, so little time to analyze companies. A lithium ETF bypasses the choices, allowing you to invest in numerous companies with one share.
- Possible hedge against volatility. The built-in diversification could help protect the value of your investment during troubling times.
Cons of investing in lithium ETFs
- Potentially less return on investment than stocks. For investors who crave higher returns, lithium ETFs may grow at an uncomfortably slow pace. Picking winning lithium stocks could give you a good return on investment.
- Trading fees and MERs. Because ETFs trade like stocks, you’ll pay a trading commission when you buy and sell them. Likewise, you’ll pay your fund manager the MER every year.
- Low or no dividend. Very few lithium ETFs pay a dividend to shareholders. Of those that do pay dividends, the dividend yield is often insignificant when you factor in the MER.
- There are still investing risks. Make no mistake, you can lose money on a lithium ETF. Though they have less price volatility than lithium stocks, lithium ETFs can produce negative returns if the entire lithium industry performs poorly.
Are lithium ETFs right for you?
Lithium ETFs are ideal if you’re a moderately conservative investor and want decent exposure to a large part of the lithium market. It might be fitting for the moderately conservative, though likely too risky for conservative investors and not rewarding enough for those who want higher returns.
It’s important to consider management expense ratios and trading commissions when buying ETFs. You might also want to look at the year-to-date return and various assets (in this case, lithium companies) under management.
For those who want higher returns, you might want to consider investing in individual lithium stocks. Our guide on lithium stocks could help you identify some great lithium companies to start with.