With the rise of electric-powered vehicles and Tesla's announcement that it's building a 5 million-square-foot factory in Nevada, the lithium used in the production of batteries might seem like a good investment. The Global X Lithium ETF, which tracks a market-cap-weighted index of global lithium producers, thus holds some appeal, but experts urge caution.
"It's a very, very narrow slice of the market," Goldsborough warned, speaking to the ETF's lack of liquidity and volatility. "An investor would need an incredibly strong level of commitment to that industry and would [still] need to make it a small portion of their portfolio." He added that the broad U.S. market has outperformed LIT over the past three years. The fund is up 5.17 percent year-to-date—compared to a year-to-date return of more than 8 percent in the S&P 500 and 12 percent in the Nasdaq 100. LIT has gathered $59 million in assets.
Bogart warned that LIT's 22-stock portfolio defines the lithium market generously. "It takes an interesting approach to capturing the lithium theme by investing in a range of companies, from household-electronics producers to chemicals companies," he said.
It's also worth noting that, in aggregate, LIT's portfolio companies are losing money, not making it, according to an ETF.com analysis. Bogart said that for an ETF that only features 22 stocks, there are quite a few that are losing money, and that is evident in a price-to-earnings ratio that ETF.com calculates to be at -5,119—yes, that's a negative before the 5,119.
While Global X lists a P/E of 21 on its website, Bogart said fund managers often toss out negative earnings entirely or cap negative earnings at a certain value and use that capped amount when calculating P/E. The reason that issuers do this is 1) it often makes their funds look more attractive and 2) because a negative P/E ratio is counterintuitive and completely lost on most investors. Either way, tossing them out or capping them distorts the real P/E picture, the ETF.com analyst said.
Global X declined to comment, but it's worth looking at the counter-argument: While the P/E ratio is eye-popping, it should be taken with a grain of salt. As in many immature industries, it is expected companies will lose money in their early history. One example: Tesla.