In times of significant market volatility, it is important for investors to not just aim for upside movement of stock prices, but to also protect themselves against downside risk. Amid the coronavirus pandemic and US elections, stocks in 2020 have seen much more volatility than in a decade. Selected tech stocks, particularly those that benefit from stay-at-home regulations, have done the best for 2020, along with vaccine-related stocks. However, these stocks have done exceptionally well because of a pandemic — and investors should take note that these exceptional gains are not sustainable. Investors ought to expose their portfolios to longer-term growth plays if they seek volatility.
The incoming Biden administration in the US has plans to rejoin the Paris Accord and for a multi-billiondollar “green” infrastructure investment programme. In the next four years, focus on curbing emissions by the US, EU and China may turn investor attention to the electric vehicle (EV) sector, to companies beyond Tesla.
Part of the EV value chain is the lithium sector, as lithium is a key component of batteries used to drive (pun intended) EVs.
Of course, Tesla, the bellwether stock for EVs, is part of this value chain. However, the volatility of this stock might not just attract a multitude of traders and investors, but also spook investors seeking exposure to the EV value chain. With a whopping 743% return for 2020, and a one-year volatility of 53% — more than the benchmark S&P 500 index — the question of how much higher the price of this stock can go is on everyone’s mind. It is important to recognise that portfolio allocation is important, as much as the fundamentals of the company are important. As it stands, based on analysts’ consensus on Bloomberg, the target price is a dismal 43% lower than its current trading price. So, how do investors get exposure to this multibagger without having to worry much about the downside risk? Simple — buy a lithium ETF with exposure to the EV value chain.
The case for buying into the EV value chain is because of the strong growth in demand for EVs. Demand has grown more than fourfold from 2015 to 2019, according to global market research. The growth drivers for the EV industry are also strongly supported by state policies and regulations — which are systemic and sustainable. China has the largest share of EV market — and its state policies such as the pledge to become carbon-neutral by 2060 are an example of why the EV market is bound to grow at a sustainable rate over the short, medium and long term. Within the EV value chain, investors, through an ETF, can get exposure to the upstream lithium miners and all the way downstream to the EV automobile makers.
As per our piece in Issue 955 (Exposure to electric vehicles and batteries through ETFs, Oct 19, 2020), we mentioned two of the largest EVrelated ETFs to buy for exposure to the EV value chain. They were Global X Lithium & Battery Tech ETF (GXLBT) and Battery Tech & Lithium ETF (BTL). Both these ETFs cover the EV value chain as opposed to a single segment of the value chain. For the year 2020 alone, GXLBT and BTL gained 127.8% and 63.1% respectively; and they have gained a further whopping 68.9% and 34.5% respectively since our Issue 955 article. As it stands, the dividend yields of GXLBT and BTL are 0.36% and 0.90% respectively.
To recap, GXLBT is the largest and most liquid lithium ETF. It is incorporated in the US, and listed on NYSE Arca. GXLBT tracks the Solactive Global Lithium Index, which tracks the performance of the largest and most liquid companies active in exploration and mining of lithium or the production of lithium batteries globally. This ETF’s market cap is currently at US$2.42 billion, while its 90-day average daily trading volume is 2.1% of its shares outstanding. GXLBT’s top three holdings are Albemarle Corp (11.7%, listed in New York), Ganfeng Lithium Co (6.6%, listed in Shenzhen), and Contemporary Amperex Technology (5.6%, listed in Shenzhen). The ETF currently has 46 companies in its portfolio.
BTL is incorporated in Australia, and listed on the Australian Stock Exchange (ASX). BTL tracks the performance of Solactive Battery ValueChain Index, which 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’s market cap is currently at A$86.3 million ($88.6 million), while its 90-day average daily trading volume is only 0.9% of its shares outstanding. BTL’s top three holdings are Pilbara Minerals (5.0%, listed on ASX), Galaxy Resources (5.0%, listed on ASX), and Tesla (4.2%, listed on Nasdaq). The ETF currently has 31 companies in its portfolio.
This time around, we would like to introduce two ETFs more focused on the downstream part of the EV value chain. The first is the iShares Self-Driving EV and Tech ETF (IDRV), incorporated in the US and listed on NYSE Arca — where most of the ETFs are usually listed. IDRV tracks the investment results of an index composed of developed and emerging market companies that may benefit from growth and innovation in and around EVs, battery technologies and autonomous driving technologies. This is the NYSE FactSet Global Autonomous Driving and Electric Vehicle Net Total Return Index.
The ETF gives access to companies at the forefront of self-driving and EV innovation, and exposure to global stocks along the full value chain of self-driving and EV industries, across sectors and geographies.
IDRV’s market cap is currently at US$155 million, while its 90-day average trading volume is 1.9% of its shares outstanding. The ETF’s top three holdings are Tesla (4.8%), Samsung Electronics (4.4%, listed in South Korea) and Toyota (4.1%, listed in Tokyo), and it currently has 100 companies in its portfolio. GXLBT’s main geographic exposure is to the US (45.0%), followed by Germany (10.3%) and South Korea (10.3%).
The ETF’s one-year return is 62.5%, while its three-month return is at 28.9%. IDRV’s dividend yield is currently at 0.26%, with a semi-annual dividend frequency. The average dividend yield, price to cash (P/C) and price to book (P/B) for this ETF’s portfolio of holdings are 1.24%, 10.4 times and 2.3 times respectively. Of the ETF’s assets, 99.8% are invested as equity, while the remaining 0.2% is held as cash. The full expense ratio for this ETF is 0.47%, and it currently trades at US$44.29 per unit.
Another similar ETF is the Global X Autonomous & Electric Vehicles ETF (DRIV). DRIV is incorporated in the US and listed on NYSE Arca. This fund tracks the performance of the Solactive Autonomous & Electric Vehicles Index, which in turn tracks the performance of companies active in the EVs and autonomous driving segments. This ETF provides exposure to the development of EVs and autonomous vehicles, including the production of electric/hybrid vehicles, electric/hybrid vehicle components and materials, autonomous driving technology, and network connected services for transportation across the world.
DRIV’s market cap is currently at US$269 million, while its 90-day average trading volume is 2.3% of its shares outstanding. The ETF’s top three holdings are Tesla (4.6%), Qualcomm (2.8%, listed on Nasdaq) and Nio (2.8%, listed in New York). DRIV currently has 78 companies in its portfolio. DRIV’s main geographic exposure is to the US (57.9%), followed by China (7.6%) and Japan (7.2%).
The ETF’s one-year return is 65.7%, while its three-month return is at 40.7%. DRIV’s dividend yield is currently at 0.28%, with a semi-annual dividend frequency. The average dividend yield, price to cash (P/C) and price to book (P/B) for this ETF’s portfolio of holdings are 0.91%, 11.9 times and 2.5 times respectively. Of the ETF’s assets, 99.8% are invested as equity, while the remaining 0.2% is held as cash. The full expense ratio for this ETF is 0.68%, and it currently trades at US$24.91 per unit.
