Lithium Etf: A Smart Investment Strategy For Beginners

Lithium is an essential component in battery manufacturing, and its demand is expected to rise due to the growth of the electric vehicle (EV) industry and energy storage needs. As the world shifts towards clean energy, the demand for lithium is skyrocketing, and investing in lithium exchange-traded funds (ETFs) is a way to capitalise on this growing need.

Lithium ETFs provide a convenient and diversified approach to investing in the lithium market without the need to buy individual stocks or trade the physical metal. These funds offer exposure to various companies across the lithium supply chain, from mining to battery manufacturing and EV production.

When considering how to invest in lithium ETFs, it is important to choose a reputable broker, open and fund your account, decide on a budget, and then place your order. It is also crucial to stay informed about market trends and the current price of lithium.

Some popular lithium ETFs include the Global X Lithium & Battery Tech ETF (LIT), the First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN), and the L&G Battery Value-Chain UCITS ETF (BATG). These ETFs provide exposure to the lithium market and offer the potential for lucrative returns as the demand for lithium continues to grow.

How to choose a broker

When choosing a broker, there are several factors to consider. Here are some key points to keep in mind:

• Fees: Different brokers charge different fees, so it's important to understand the fee structure and how it will impact your returns. Typical fees include transaction fees, custody/maintenance fees, dividend fees, stock exchange fees, and portfolio transfer fees.
• Domicile: Consider whether the broker is local or based in another country. Using a foreign broker may require additional work for tax purposes, and they may not withhold taxes that you are liable for in your country of residence.
• Account type and limits: Make sure the broker offers an account type that fits your investment style and risk appetite. Some accounts have minimum deposit requirements, investment limits, or restrictions on the types of ETFs you can buy.
• Available ETFs and stock exchanges: Ensure the broker allows you to buy the ETFs you are interested in and provides access to the desired stock exchanges. Some brokers may offer more advantageous prices for ETFs from specific exchanges.
• Legal structure and regulatory environment: Only use brokers that are accredited by the financial authority of their domicile. Understand the measures the broker has in place to protect your assets in the event of bankruptcy.
• Foreign currency support: If you plan to invest in a currency other than your own, check how the broker handles different currencies and whether there are additional costs for investing in foreign currencies.
• Service type: Decide what level of service you need. Discount online brokers typically provide trade execution only, while full-service brokers offer investment advice and asset management.
• Trust and reputation: Research the broker's reputation and read reviews to gauge other customers' experiences. Understand their complaint process and how they handle customer support.
• Client money handling: Some brokers are not allowed to hold client money and must invest it in money market instruments, which can affect the value of your non-invested funds.

How to open and fund your account

To trade lithium ETFs, you will need to use a third-party brokerage to gain entry into the corresponding market. The simplest way to do this is by using an online brokerage. There are several investing services to choose from, but here are two highly-rated options:

• EToro: This investing service has a robust community of over 30 million registered accounts and offers features such as commission-free stock and ETF trading, 2,000+ stocks from 17 exchanges, fractional shares, and a user-friendly platform.
• Interactive Brokers (IBKR): IBKR offers commission-free stock trading, global stock trading on 90+ market centers, fractional shares, extra income on fully paid shares, and the lowest financing rates for margin accounts in the industry.

Once you have chosen a brokerage, you will need to create and verify your account. After registering, the investing platform will send you instructions on how to do this.

The next step is to transfer money into your account so that you can begin investing in lithium ETFs. Common funding methods include bank transfers, debit or credit cards, and transaction services like PayPal.

It is important to plan your budget before investing and to only invest what you can afford to lose. To ensure a stable and safe investment, make sure you have paid off all high-interest debt, such as credit cards and personal loans, and have created an emergency fund that covers at least three months of daily life expenses.

How much to invest

Before investing in lithium ETFs, it is crucial to plan your budget and stay within your limits. Here are some key considerations to help you determine how much to invest:

• Risk Tolerance: Investing in the lithium market, particularly in lithium stocks, can be risky due to price volatility. Therefore, it is essential to assess your risk tolerance and allocate your funds accordingly.
• Diversification: To mitigate risk, consider diversifying your portfolio by investing in various companies across the lithium supply chain, from mining to consumer electronics manufacturers. This strategy can help reduce the impact of individual company performance on your overall investment.
• Financial Health: Ensure that you have paid off all high-interest debt, such as credit cards and personal loans, before investing. It is also wise to have an emergency fund that covers at least three months of daily expenses.
• Budget Allocation: Determine how much of your budget you want to allocate to lithium ETFs. Remember to invest only what you can afford to lose and stay within your risk limits.
• Long-Term Perspective: Investing in lithium ETFs should be considered a long-term strategy. Keep in mind that the lithium market can be volatile, and short-term price fluctuations may occur. Be prepared to hold your investments for the long term to ride out any temporary downturns.
• Market Research: Stay informed about market trends, lithium prices, and the performance of specific ETFs. Making informed investment decisions based on research can help you maximise your returns and minimise losses.
• Expert Advice: Consider seeking advice from a financial advisor or investment professional. They can provide personalised guidance based on your financial situation, risk tolerance, and investment goals.
• Regular Review: Once you have invested in lithium ETFs, regularly review your portfolio's performance. Stay updated with market trends and be prepared to make adjustments to your investment strategy if needed.

Remember, investing in lithium ETFs involves risks, and there is no guarantee of profits. Always do your research, stay informed about market trends, and make investment decisions that align with your financial goals and risk tolerance.

How to place your order and trade

To place an order and trade an ETF, you can follow these steps:

• Select the account you want to trade in.
• Enter the trading symbol.
• Select "Buy" or "Sell".
• Choose between "Dollars" and "Shares", then enter an amount.
• Choose an order type: Market or Limit.
• For limit orders, decide how long the order will stay open: "Day" or "Good 'til Cancelled (GTC)".

Market Order

A market order is the simplest option and is the default at most brokerages. It is an order to buy or sell an ETF at the best available price in the market at that moment. The pro of a market order is that it prioritizes speed of execution, but the con is that you do not know the exact price you will pay or receive for the ETF.

Limit Order

A limit order is an order to buy or sell an ETF at a specified price. It gives you control over the price but may not be filled. Limit orders are ranked according to price competitiveness, with the highest bid/lowest ask ranked first. Therefore, it is not guaranteed that a limit order will be executed in full or at all during the trading day. However, when market volatility occurs, a limit order can provide some protection from unexpected political or economic announcements that may cause a significant change in an ETF's unit price.

Stop-loss Order

A stop-loss order is a longer-term conditional order that can stay in the market until it is filled or cancelled by the investor. It helps curb losses or protect gains by triggering a market order for an ETF once it reaches a specified unit price. The advantage is that it gives you an automatic way to exit your position once the specified price is reached, but the ETF price may drop temporarily, and if the stop-loss price is triggered, a sell order is automatically created.

Best Practices for Executing ETF Orders

• Be aware of trading activity in the first and last 15 minutes of the trading day as these periods are the most volatile.
• Choose limit orders to help pre-determine your buy and sell price points.
• Steer clear of trading during volatile periods unless you are trading volatility-related ETFs.
• Be aware of liquidity and invest in ETFs with high trading volume to narrow the bid-ask spread and lower your transaction costs.
• Trade "large blocks" of ETFs (above 5,000 or 10,000 shares) to maximize liquidity, assets under management, and overall returns.
• When trading international ETFs, enter the trade when the local markets are open to ensure new information is reflected in the security's price.

Pros and cons of investing in lithium ETFs

Pros

• Diversification: Lithium ETFs offer a diversified investment across the lithium cycle, from mining companies to battery manufacturers to EV automakers. This means that if one company in the ETF reports bad earnings, other companies in the fund may prop up the fund's share price.
• Reduced Risk: Investing in a lithium ETF reduces your risk compared to investing in individual lithium stocks.
• Less Work: Buying a lithium ETF requires less work, research, and oversight than buying individual shares of lithium stocks.
• Exposure to a Volatile Asset: Lithium is a volatile asset that can become a big hit if EVs and renewable energy solutions continue to gain momentum.
• High Growth Potential: Due to rising demand and inelastic supply, tight lithium markets are expected to persist through the end of the decade.

Cons

• Volatility: Lithium and battery stocks will likely be far more volatile than the stock market overall.
• Performance: The performance of a lithium ETF is dependent on the market price of lithium. When lithium prices have dropped, lithium ETFs have underperformed.

Frequently asked questions