ETFs are an easy way to gain broad exposure to comprehensive and niche markets, and one ETF that tracks rare earth and strategic metal miners was under the microscope of some large investors on Monday.
On Monday, the VanEck Vectors Rare Earth/Strategic Metals ETF (NYSEArca: REMX), which is comprised of global companies involved in producing refining and recycling rare earth and strategic metals and minerals, jumped almost 7% – over 37 times its average daily volume.
What is interesting about the rise in REMX is the lack of broad strength in the rare earth metals miners category to justify the rally.
REMX was trading at a 6.2% premium to its underlying holdings. Looking at its portfolio, most of underlying components were trading in the red with Bushveld Minerals, which makes up 4.6% of the ETF, down as much as 11.5%. On the other hand, CIA de Ferro Ligas da Bahi, which accounts for 4.0% of the ETF, stood out, rising 4.1%.
ETFs try to reflect the performance of a basket of securities, and an ETF’s price tries to more-or-less reflect the price of net asset value or underlying holdings. However, in some cases, an ETF can trade at a steep discount or premium to its underlying holdings or NAV.
In today’s case, REMX is trading at a 6.2% premium to its NAV, or in other words, the ETF is overpriced when compared to its net holdings.
This is not too surprising given the action in the ETF on Monday, with 2.8 million shares or 37 times its daily average changing hands. Moreover, REMX has a 76.9% tilt toward small-caps and a 13.3% position in micro-caps, which suggests that its underlying components are relatively small and less liquid than large-cap-related peers. The lower liquidity in smaller components may make it harder for Authorized Participants to arbitrage the difference away and bring back the ETF’s price to reflect its NAV.
Looking at the premium or the price discrepancy between the ETF and the broader rare earth space, one or some large investors may also be trying to use the ETF to secure shares of one of the underlying small-cap components found in REMX.
Instead of buying up large amounts of shares on the secondary market and negatively affecting the price of a small-cap company, some large investors may look to an ETF to indirectly gain exposure to a small-cap company share, which can be garnered through an ETF’s in-kind creation/redemption process.