How to Profit From Rare Earth Stocks


Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some rare-earth-mineral-focused stocks to your portfolio, the Market Vectors Rare Earth/Strategic Metals ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Market Vectors ETF's expense ratio -- its annual fee -- is 0.59%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is relatively young, so it doesn't have a substantial track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why rare-earth elements?
Rare-earth minerals and metals are used in industry, and as the global economy recovers and grows, demand for these resources should also grow.

Some rare-earth companies had solid performances over the past year, but many were pressured by low prices for rare-earth elements. RTI International Metals , up 14%, recently posted its first-quarter results, featuring revenue up 21%, and a backlog near record-high levels. Management noted a subdued environment but expected things to pick up in the second half of the year.

Other companies didn't do as well last year but could see their fortunes change in the coming years. Molycorp has plunged more than 71% over the past year, even while surging a bit recently after topping expectations for its recent quarter and projecting growing industrial demand for rare-earth elements. The company hasn't always treated shareholders well, but some expect 2013 to be much better for them than 2012.

Avalon Rare Metals sank 35%, with some speculating that the company, a penny stock at recent levels, might get bought out. It has been posting net losses and has negative free cash flow and very modest revenue.

Thompson Creek Metals shed 12%, troubled by a costly buildout of its Mt. Milligan copper and gold mine and low prices for its primary product, molybdenum. But some maintain high hopes for the company's future, seeing prices recovering.

The big picture
Long-term demand for rare-earth elements isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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