Think batteries are going to be more valuable in the future and want exposure to lithium? Maybe we should give the lithium ETF $LIT a shot?
A lot of people have different investment ideas. Some people invest based off what their children are interested in. Others invest off the weather (yes, they do). Some like to invest in things they feel will be around for a long time.
Lithium and batteries are something that might be around for a long time especially if Tesla makes any movement in their Giga factory in creating the world’s most ridiculous battery.
If you want to invest in batteries, maybe investing in the lithium ETF $LIT is the right move…or maybe not! We will show you everything you need to know about the lithium ETF $LIT and see if it is the right choice for you.
The Lithium ETF…What’s it all About?
For those of you never knew that one could trade lithium, welcome to the show! Most people probably have no idea how lithium trades. Here is what the stock has done over the last year.
Not bad at all. A 26% return is nothing to snuff at. But how does lithium trade against things we have heard of before?
Here we compared the price movement of lithium and the lithium ETF $LIT over the last year against equities ($SPY), precious metals ($GLD), the dollar ($UUP), short-term bonds ($IEF), and emerging markets ($EEM). It looks like lithium trades with the most correlation to equities and emerging markets.
So we have decided we want some lithium exposure. We must check the liquidity of the lithium ETF $LIT to see if it is a viable product for us. Let’s look at the bid/ask spread on the stock.
$0.08 wide on the stock is large. Especially for an ETF. I don’t like the look of this. How much volume was traded today?
Not great volume either. No wonder the bid/ask spread was so wide. $5,532,705.75 in notional value in one day is absolutely nothing. There is no institutional interest here. Maybe the options market is better?
So bad. One contract???
No bids on the closest out of the money call expiring in 11 days? OMG. So bad.
We need to stay away from $LIT. It is an absolute no go. Completely remove the lithium ETF $LIT from your memory.
What do we do Then?
We cannot trade $LIT. No volume. No options. No liquidity. Stay away.
However, if we think the value of lithium is going to go higher and we want exposure, can we find something that is liquid that gives us a similar correlation to lithium?
$XLB is the material ETF that happens to trade with an 85 correlation for $LIT and the price of lithium. That means it has the same price movements as $LIT does 85% of the time. Highly correlated.
We can see $LIT and $XLB move hand in hand. 85 correlation means we will have very similar price movement.
But is $XLB liquid? $LIT sure as hell wasn’t.
Ah. Much better. Almost four million shares with a total notional value of $199,698,528.26. We know that the bid/ask spread on the stock will be tight with this many millions of shares traded.
How about options? Remember, we need quality options markets to be able to hedge our positions and better our chances of making money.
Passable. And definitely better than the alternative. While $12,986,688 is not a great deal of money in total notional value, these are definitely quality options markets as the big/ask on the at the money options are only a few pennies wide.
Winner, winner. Chicken dinner.
Want exposure to lithium? Stay away for $LIT. No volume. No options. No interest from institutions. Nobody cares, etc. But If you really want exposure to lithium, try $XLB. This materials ETF price moves with $LIT 85% of the time and has enough stock and options volume to get in and out whenever we want!