The 1st of February will mark the third anniversary of the introduction (payment under subscription) of the tracker certificate on the Swissquote Rare Earth Index. It was to take some time before this investment idea ignited the Swissquote equity strategists. Following the outbreak of the coronavirus pandemic the index initially dropped sharply – in March 2020 it was trading at less than half the starting level. As was the case in many other sectors, though, the Covid-19 crash also proved to be an opportunity to jump on board: shortly before its third birthday, the tracker certificate is trading at almost three quarters above the issue price (see chart). That means the structured product has beaten the global equity market by some distance. The MSCI® World Index – based on a start date of 1 February 2019 – has posted a gain of 60%. The outperformance is not without reason: the pandemic has, after all, given the central demand driver of rare earths a turbocharged boost.
"Rare earth metals are used as components in high technology devices such as smartphones, flat screen televisions, computer monitors and electronic displays," say the Swissquote experts. During the coronavirus-induced restrictions on contact – think home office – sales in this sector rose sharply. Use of the lustrous silvery-white materials extends well beyond the IT segment, however, with rare earths being found not only in electric vehicles, but also in satellites, wind turbines and jet engines. According to Swissquote, there are as yet no viable alternatives to these raw materials. At the same time, they are difficult and costly to mine and process. "Some are running out, which will push their value even higher," the strategists add. Effective recycling, in their view, is de facto not possible. Here the experts refer to Apple: the technology giant uses rare earth metals for speakers, cameras and 'haptic' motors that make its smartphones vibrate, but the metals are used in such small quantities that they are difficult to recover.
In the view of the Swissquote analysts, demand for these materials should grow by 15% over the next few years. This is where the Rare Earth Index comes into its own. It targets companies which are best placed to benefit from the growth of the market for rare earths and their increasing scarcity, Swissquote has chosen to realise this investment approach through a stringent selection process. "We have scrutinised companies that are part of the production value chain, including exploration, mining and processing," the managers explain. It goes without saying that the shares must also meet quantitative requirements in order to be considered for the barometer. Alongside a market capitalisation of at least USDmn 100, this includes an average daily trading volume of around USD 100,000. The index sponsor carries out a rebalancing operation every three months. Extraordinary adjustment is possible in certain circumstances, such as in the case of new listings.
The Swissquote Rare Earth Index currently contains 15 companies. With a total weighting of 28.3%, Australian shares set the tone. Among the 15 founding members of the selection is Lynas, which has a mining facility for rare earths in Western Australia. According to its own figures, the "Mt Weld" mine has some of the highest value deposits of these metals. In Malaysia Lynas operates the world's largest processing plant for rare earths, from where the group ships its end-products to Asia, Europe and the USA. Analysts expect Lynas to grow strongly in the years ahead. Earnings per share are forecast to triple to AUD 0.54 in 2024 from AUF 0.18 last year (as at 30.06). In view of this outlook, Lynas' strong performance is not without reason, the share having gained almost 600% in value since 1 February 2019. The "rare earth all-rounder" has thus made a key contribution to the vigorous track record of the Swissquote Rare Earth Index.
Management fee: 0.70%
Index Sponsor: Swissquote Bank SA
Issuer: Leonteq Securities AG
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