Global X is set to begin trading their “Global X Lithium ETF” (LIT) this Friday July 23rd. This will be a first of its kind fund on any exchange as the highly reactive metal isn’t traded on any commodity exchange. The Global X Lithium ETF will seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Lithium Index. 

Based on the current holdings, which can change at any time, the fund is not well diversified at the sector level. There appears to be no utilities, telecom or energy holdings but large weightings to growth areas like tech, healthcare and consumer stocks. This is not a negative per se as anyone buying this fund is buying the decisions of the managers.

The difficulty in owning a fund like this is that the current holdings might fit in with someone’s portfolio today but as there is no way to know what the fund will own in the future there is no way to know how it would fit in to a portfolio in the future, but this is true of all actively managed funds.

The one space where I think an actively managed ETF would be a boon to investors is in the financial sector. That may seem surprising given how down I am on the sector and how down I’ve been on it since before this site started, but that is exactly the reason why an active ETF could make a lot of sense. If you look under the hood of just about any financial sector ETF and what do you see? If it is a domestic fund you see JP Morgan (JPM), Bank of America (BAC) and Citigroup (C). If it is a foreign sector fund you see HSBC (HBC), Banco Santander (STD)–the one from Spain– and a French bank or two. Further down the list you’d probably see some UK banks.

People have made great trades on a lot of these names but in terms of investing I want no part of them. There is no convincing me there are no more shoes to drop (something I have been saying all along). An actively managed financial sector ETF could potentially bypass or at least underweight US and European banks.

Looking over longer periods of time there have been foreign banks that have had relatively little attention paid to them — that is, they have not been in the news much — that have done quite well in what has been a down market.

We have owned the same Australian bank since before this site started and for the last five years it is up 22% versus the Financial Sector SPDR (XLF) which is down 53% in five years. We have had the same Canadian bank since before this site started and for five years it is up 37% and our Chilean bank we probably first added in late 2004 but were out of it for a short period of time and it is up 127% for five years. Additionally all three pay very large dividends. We also own a publicly traded exchange and an index provider.

The catalyst for looking for these banks way back when was, and this will be a repeat for long time readers, that the financial sector’s weight in the S&P 500 exceeded 20% which I take as a warning of trouble. This is not intended to be a brag after the fact as I’ve been writing essentially the same thing since the start of this site in 2004. I’ve also been been saying that this sort of analysis and then finding stocks that fit the bill is not terribly difficult.

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.

Solactive Global Lithium Index:
 
The Solactive Global Lithium Stocks Index is designed to reflect the performance of the lithium industry. It is comprised of common stocks, ADRs and GDRs of selected companies globally that are primarily engaged in some aspect of the lithium industry such as lithium mining, exploration, investing, and lithium-ion battery production. The stocks are screened for liquidity and weighted according to free-float market capitalization. A specific capping methodology is applied at the semi-annual index review to facilitate compliance with the rules governing the listing of financial products on exchanges in the United States. The index is maintained by Structured Solutions AG.