How to Invest in Lithium

As the electric vehicle (EV) market continues to surge, a soft, silver-grey metal is stealing the spotlight: lithium. As the backbone of modern batteries powering everything from smartphones to Teslas, lithium’s importance can’t be overstated. 

With identified lithium resources growing by the day and applications ranging from medicine to aviation, the metal’s potential as a growth-oriented investment theme is enormous. 

Intrigued? Keep reading to unearth how you can invest in this light yet powerful element that’s electrifying our future.

Lithium is a unique element in many ways. It’s the lightest of all metals and extremely reactive, especially when exposed to water and air. When alloyed with metals like magnesium, it forms remarkably strong and durable compounds. Despite its reactivity as a pure element, its compounds are highly stable, making it versatile for various applications.

In recent years, lithium resources have seen a significant increase, with the United States Geological Survey (USGS) estimating over 86 million tons identified globally as of 2020. These resources are primarily found in brines, minerals and clays. 

Various chemicals, such as lithium carbonate and lithium hydroxide, can be formed from lithium, but its most prolific use today is in batteries, both rechargeable and non-rechargeable.

Lithium batteries have drawn the bulk of industrial attention, powering cell phones, laptops, power tools and even stabilizing electricity grids. They offer high energy density and are lighter compared to lead-acid or nickel-based batteries.

In recent years, lithium batteries have increasingly become the go-to power source for electric vehicles, including e-bikes, buses and passenger cars. As climate change and renewable energy concerns come to the forefront, trends like vehicle electrification could lead to higher demand for lithium. 

From owning individual company stocks to placing bets on exchange-traded funds (ETFs) or investing directly in mining ventures, there are multiple avenues to capitalize on lithium’s growing demand. 

Investing in lithium stocks is one of the most straightforward ways to gain exposure to the lithium market. In general, there are four types of companies you can invest in. Keep in mind that these categories are not mutually exclusive, as one company can encompass two or more verticals. 

1. Producers: Companies that extract lithium from the ground.
2. Refiners: Businesses that process raw lithium into a usable form.
3. Royalty companies: Firms that finance mining operations in exchange for a share of future revenues.
4. Distributors: Companies that distribute processed lithium to end-users, such as battery manufacturers.

When picking lithium stocks, investors should look at multiple variables, some company-specific and others more macro in nature:

• Financial health: Review the company’s balance sheet, income statements and cash flow to gauge its financial stability by checking key financial ratios.
• Growth potential: Consider the company’s plans for expansion, its revenue and earnings guidance and its market share.
• Industry trends: Keep an eye on projected global lithium demand, especially from sectors like electric vehicles, renewable energy and consumer electronics or from any legislation or regulation affecting the industry. 

ETFs offer a relatively less risky way to invest in lithium by spreading risk across multiple companies from different verticals, market cap sizes and geographies, at the cost of an annual fee to the ETF manager. 

1. Global X Lithium & Battery Tech ETF (NYSEARCA: LIT): This ETF tracks the Solactive Global Lithium Index. It currently has 40 holdings and charges a 0.75% expense ratio. As of June 30, 2023, LIT has returned an annualized 27.64% over the last three years. 
2. Amplify Lithium & Battery Technology ETF (NYSEARCA: BATT): This ETF tracks the EQM Lithium & Battery Technology Index. It currently has 112 holdings and charges a 0.59% expense ratio. As of June 30, 2023, BATT has returned an annualized 15.68% over the last three years.

Another way to invest in lithium is via mining companies. These are the producer companies that bring lithium from underground reserves to the surface or engage in the exploration of possible deposits and reserves. 

Examples of notable lithium mining companies include Albemarle Corp. (NYSE: ABE), Lithium Americas Corp. (TSE: LAC) and Sociedad Quimica y Minera S.A. (NYSE: SQM). 

Analyzing lithium mining companies involves assessing many of the previously mentioned variables of all lithium companies, but with a greater focus on the following:

• Mining locations: Assess where the mining operations are located, as geopolitical stability can impact operations.
• Existing reserves: Companies with larger reserves are generally better long-term bets.
• Production capabilities: Look into their capacity to meet increasing lithium demand.
• Environmental practices: Increasingly, companies with strong sustainability practices are being favored.

Diversification is a key principle in investment strategy. Even if you’re bullish on lithium, it’s wise to not put all your eggs in the basket of a single company, market cap size or geography. The following practices can help you diversify a lithium-focused portfolio:

• Combining stocks: Consider a mix of producers, refiners and perhaps royalty companies to create a balanced lithium-focused portfolio.
• Other renewable investments: Think about complementing your lithium stocks with investments in other renewable energy sectors like solar or wind.
• Battery manufacturers: Since lithium is a crucial component of batteries, companies that manufacture lithium-ion batteries can be an excellent addition to diversify your investments further.

• High growth potential: According to McKinsey, with the increasing demand for EVs, renewable energy storage and portable electronics, the lithium market is projected to see robust growth. Investing in lithium could offer the opportunity to capitalize on this upward trend.
• Diversification into green technology: As countries and companies aim to reduce their carbon footprint, lithium’s role in renewable energy and electric mobility makes it a key asset in the green technology sector. This factor allows investors to diversify their portfolios by adding an eco-conscious component.
• Strong government and industry support: Government incentives for electric vehicles and renewable energy sources like the Inflation Reduction Act are indirectly benefiting the lithium market. This layer of support adds a level of stability to the investment, as it’s aligned with long-term global policy objectives.

• Market volatility: Like any commodity, lithium is subject to price volatility based on supply and demand dynamics. Unexpected shifts in these factors can lead to sudden price changes, impacting the return on investment.
• Geopolitical risks: Major lithium reserves are located in specific geographical areas that might be subject to political instability, changes in regulation or trade tensions. These factors can influence the accessibility and cost of lithium extraction.
• Technological advancements: While lithium is currently a crucial element in battery technology, breakthroughs in alternative technologies could potentially reduce its importance. Investors must be aware of the evolving tech landscape that could disrupt the lithium market.

Investors looking to research and choose the best lithium stocks and ETFs can use Benzinga to compare the available selections available on the market. Here is a list of brokers that support trading in lithium stocks and ETFs and offer research tools to help investors select the right one.

Lithium appears poised to play a critical role in an increasingly electrified world. Its high demand in various applications, notably in EVs and renewable energy storage, makes it a compelling investment opportunity. 

With strong governmental and industry backing, lithium is not just a trend but seems to be aligning with the global move toward sustainable energy. However, like any investment, it carries its set of risks — from market volatility to geopolitical uncertainties. 

A well-researched, diversified approach is key to capitalizing on this high-growth market. By allocating tactically between different types of lithium stocks and ETFs, investors can craft a balanced portfolio that fits their risk tolerance and outlook.