What are ASX lithium ETFs?
They are exchange-traded funds (ETFs) listed on the Australian Securities Exchange that invest in companies in the lithium sector. They are a type of thematic ETF.
Lithium is a crucial component in lithium-ion batteries that power everything from electric vehicles (EVs) to laptops. Global demand for lithium is expected to double between 2025 and 2030.1
A brief introduction to lithium
Lithium is a crucial ingredient in lithium-ion batteries, the lightweight, rechargeable batteries that power laptops, phones, EVs, and other digital devices. Lithium is produced by mining lithium-containing rock or extracting lithium salts from underground brine reservoirs. The world's largest known lithium deposits are in Australia, Chile, China, and Argentina. Australia is the world's biggest producer and exporter of lithium.2
The shift to clean energy and electric vehicles is driving demand for lithium. Lithium prices were strong in 2022, which saw ASX lithium stocks outperform. However, the market is expected to soften in the latter half of 2023 as supply begins to catch up.
A brief introduction to ETFs
ETFs are pooled investment vehicles where a fund manager raises money from many investors and then uses that cash to invest in a portfolio of assets. These might include shares, bonds, commodities, or even cryptocurrencies. Most Australian ETFs are passive investments that seek to track the value of an index. An active ETF, by contrast, is more akin to an actively managed fund with a manager making active investment decisions.
You can invest in many different types of ETFs, including those that focus on a specific industry or commodity. Others give broad exposure to share markets both in Australia and offshore. You can invest in ETFs that fit your values, investment objectives, and financial situation. With more than 200 ETFs listed on the ASX (and counting), this type of investing has become more popular.
How to invest in ETFs in Australia
ETFs are listed on stock exchanges. You can buy and sell units in an ETF the same way you purchase shares through a stockbroker or via an online share trading platform. Because ETFs hold a basket of securities, they provide investors with instant diversification.
You pay brokerage (or an online trading fee) when buying into an ETF, just as you would when buying ASX stocks. However, the commission on a single purchase of ETF units is much cheaper than what you would have to pay to buy each individual asset held within the ETF.
What about international funds?
Many ETFs listed on the ASX expose investors to international markets, such as the United States and Europe. This includes ETFs that provide broad market exposure by following an index such as the S&P 500 and sector or thematic ETFs, which may comprise companies from a range of jurisdictions.
There are also many ETFs listed on offshore exchanges that may be of interest to Australian investors. To access these offshore ETFs, Australians need to set up an account with a broker that provides access to these securities.
Why invest in lithium ETFs?
As lithium price momentum continues, ASX lithium stocks have benefitted from tailwinds. Demand for the battery metal remains strong, driven by the shift to clean energy and advances in battery technology. But lithium prices can be volatile.
As demand increases, new mines can open, increasing supply and putting the brakes on price increases. Analysts expect lithium prices to begin to soften from the second half of 2023 as supply starts to catch up with demand, which could impact the share prices of lithium companies.
Investing via an ETF means investors will benefit from diversified exposure to the lithium sector, with money effectively spread across several different lithium companies. Some of these companies may perform well, while others may falter. But because the investment is spread across a number of holdings, risk is lowered. The investor avoids putting all their eggs in one basket.
Top lithium ETFs on the ASX
There is currently just one ETF specific to lithium on the ASX. That's the Global X Battery Tech & Lithium ETF (ASX: ACDC). This ETF invests in companies throughout the lithium cycle, including mining, refinement, and battery production. It offers investors exposure to global companies developing electrochemical storage technology and mining companies producing battery-grade lithium.
The Global X Battery Tech & Lithium ETF invests in companies globally, including Japan, Germany, Australia, the United States, and South Korea. These companies operate in the industrials, materials, information technology, consumer discretionary, and communications services sectors.
The fund benchmarks its performance to the Solactive Battery Value-Chain Index, which tracks providers of electro-chemical storage technology and mining companies producing metals primarily used to manufacture lithium batteries.
For investors willing to move beyond the ASX, there are lithium ETFs listed on offshore stock exchanges such as the New York Stock Exchange (NYSE) and the NASDAQ.
On the NYSE is the Global X Lithium & Battery Tech ETF (NYSEARCA: LIT).
On the NASDAQ is the iShares Global Clean Energy ETF (NASDAQ: ICLN), which goes beyond batteries to encompass more aspects of the renewable energy space. For an even broader clean energy focus, the First Trust NASDAQ Clean Edge Green Energy Index Fund (NASDAQ: QCLN) focuses on everything from batteries to solar power to electric vehicles.
Pros of investing in lithium ETFs
Investing in sustainability: The metal extracted by lithium miners can be used for sustainable purposes, with lithium used to power EVs, wind turbines, and smart electric grids, all of which can reduce emissions.
Diversification: Investing in lithium can diversify your portfolio by providing exposure to a different sector of the market. Diversification is key to ensuring your money is spread across a range of investments whose performances are not directly correlated.
And the cons
Geopolitical risks: Lithium producers operating in different jurisdictions face risks in the form of local laws, which may be unpredictable and which are beyond companies' control.
Environmental concerns: Lithium mining has a large environmental footprint. Mining lithium, like most metals, is a reasonably dirty business. Nonetheless, the industry is advancing its sustainability efforts toward cleaner and safer operations.
Are ASX lithium ETFs a good investment?
Whether an ASX lithium ETF is a good investment for you will depend on your financial situation and investment goals. Lithium may have a big future in powering our electronic devices, but its price will depend on the balance between supply and demand.
Investing in lithium is a form of thematic investing, where investors bet on the future performance of an industry or resource.
Investing in lithium via an ETF, rather than directly in lithium-industry companies, means investors benefit from diversification. They also benefit from exposure to companies that may be difficult to gain exposure to directly, such as companies listed on international stock exchanges.
Lithium companies comprise only a tiny component of stock markets globally, so investors should be sure to diversify their portfolios outside the sector as well.
