FUNDS & ETFS: INVESTING IN EVS AND LI-ION BATTERIES

Tesla held a “Battery Day” on Sept 22. It was an event where founder Elon Musk wanted to show off his company’s latest battery improvements. According to analysts, it was underwhelming. Tesla unveiled plans to develop a “million- mile” battery that could last an electric car’s entire lifetime on the road. It also outlined plans to dramatically reduce the cost of its battery cells and packs to US$ 100 per kWh ($ 136 per kWh), at which point experts believe electric cars will become comparable in price to combustion engine vehicles.

Electric vehicles (EVs) are the cars of the future. They can be powered naturally with renewable resources like solar, wind and water power. Being powered by a renewable source — through the car battery — is the main advantage of EVs. Petrol is polluting and several large economies have committed to becoming carbon neutral by the middle of this century. For instance, China has announced its plans to be carbon neutral by 2060.

One of the main drawbacks of an EV is its battery. These are heavy, have a shorter range than petrol or diesel engines, and batteries take longer to charge. At present, there are not enough charging stations globally and in Singapore, and the Tesla, in particular, is a very expensive car. Still, being the vehicle of the future, investors have piled into Tesla’s stock, which has outperformed the S&P500 and other broad market indices this year.

Investors have a choice. They can invest further upstream into ingredients or components of an EV such as the battery makers, or even further upstream to the main component of the lithium battery.

Battery Tech & Lithium ( BTL) ETF’s product sheet sums up the advantage of investing in an ETF rather than a single stock: “The value chain for battery technology ranges from mining companies to manufacturers of battery storage and storage technology providers. It is a diverse range of industries spanning the globe and ETFs like BTL can provide investors with obtaining diversified exposure to newer technologies as well as more established companies. In fast- moving and emerging industries, it can be hard to pick the individual winners, so investing in an ETF allows investors to access the potential growth across the battery technology megatrend.”

Hence, we have scoured the globe for ETFs that invest in the value chain of an EV, and can only find two ETFs that do so. These ETFs are a broad tent and encompass electric vehicles, battery maker and lithium producers, and many of their components overlap.

The world’s largest lithium ETF

Why go for an ETF and not a stock? After all, EV producer Tesla is up 400% or so this year, following the company reporting net profit for four consecutive quarters. The largest lithium ETF, Global X Lithium & Battery Tech (GXLBT) formerly known as LIT ETF, is up a mere 45%. Tesla is a one-man show — the Elon Musk show — despite the company’s plan to produce a more efficient battery. For investors who would want exposure to different parts of the EV value chain, an ETF focusing on such a sector could be a better choice.

As the largest lithium ETF, GXLBT is also the most liquid. Among the factors that determine an ETF, investors should pay attention to liquidity. The higher the liquidity, the more narrow the bid-ask spreads. While fees are much lower than mutual funds, expense ratios can vary among ETFs with some as low as 0.10%. Then there is tracking error. This is the percentage difference between the return an investor of an ETF receives and that of the benchmark index the ETF is attempting to imitate. It is usually caused by leakage from expenses such as fees which is captured in the expense ratio.

GXLBT is incorporated in the US, and listed on NYSE Arca which is where most ETFs are listed. GXLBT tracks the Solactive Global Lithium Index (SGLI). SGLI, in turn, tracks the performance of the largest and most liquid companies active in the exploration and mining of lithium or the production of lithium batteries globally. GXLBT currently trades at US$42.83 per unit. The full expense ratio for this ETF is 0.75%.

Although the ETF is a lithium and battery ETF, in terms of market cap, it includes 55% batteries, 27% lithium miners/ producers and 18% EV producers. In fact, the largest weightage in the ETF are from Tesla and BYD Co.

GXLBT’s market cap is currently at US$841 million, while its 90- day average trading volume is a mere 2.0% of its shares outstanding. The ETF’s Top 3 holdings are Albemarle Corp (9.7%, listed in New York), BYD (8.3%, listed in Hong Kong) and Tesla (8.1%, listed on Nasdaq), and currently has 45 companies in its portfolio. GXLBT’s main geographic exposure is to China (47.1%), followed by United States (22.0%) and South Korea (12.0%).

The ETF’s one-year return is 77.7%, while its year-to-date returns are at 57.5%. GXLBT’s dividend yield is currently at 0.85%, with a semi-annual dividend frequency. The average dividend yield, P/E and P/B for this ETF’s portfolio of holdings is 0.95%, 19.8 times and 3.5 times respectively. GXLBT is almost fully invested with 99.8% of its assets in equity and only 0.2% in cash.

Going Down Under in search of ETFs

BTL is incorporated in Australia and listed on the ASX. This fund tracks the performance of the Solactive Battery Value-Chain Index (SBVC). SBVC in turn tracks the performance of a basket of stocks that are providers of certain battery technology and mining companies that produce metals for manufacturing batteries globally. BTL is listed on the Australian Stock Exchange (ASX) and currently trades at A$63.75 per unit. The full expense ratio for this ETF is 0.82%.

The Solactive Battery Value-Chain Index represents the performance of companies that are providers of electrochemical storage technology and mining companies that produce metals that are primarily used for the manufacturing of battery-grade lithium batteries. To be included in the index, companies must have a free-float capitalisation of at least US$200 million, have a minimum three-month daily trading average of US$1 million, and not be classified by FactSet as an “Energy” company.

Companies in BTL are equally weighted, meaning each holding makes up the same portion of the portfolio at each quarterly rebalance and therefore contribute equally to overall performance.

The choice of an equal weighting scheme provides investors exposure to the overall sector without a bias towards large-cap stocks, which tend to dominate where holdings are weighted by market capitalisation.

BTL’s market cap is currently at A$31.9 million, while its 90- day average trading volume is only 0.6% of its total shares outstanding. The ETF’s Top 3 holdings are Tesla (5.8%, listed on Nasdaq), BYD Co (5.5%, listed in Hong Kong) and Tianneng Power International (4.7%, listed in Hong Kong) and currently has 30 companies in its portfolio. BTL’s main geographic exposure is to Japan ( 25.1%), followed by United States (19.0%) and Australia (12.2%).

The ETF’s one-year return is 38.6%, while its year-to-date returns are at 25.3%. BTL’s dividend yield is currently at 1.35%, with an annual dividend frequency. The average dividend yield, price to cash (P/C) and P/B for this ETF’s portfolio of holdings is 2.15%, 6.5 times and 1.2 times respectively. BTL is almost fully invested with 99.6% of its assets in equity and only 0.4% in cash.

Investors can invest directly into ETFs through a local broker or through brokers such as TD Ameritrade. Brokerage fees are cheaper for investing in GLXBT ( LIT) because it is listed on NYSE Arca compared to BTL, which is listed on the ASX.