LGCLF - BATT: Falling Lithium Price Makes EVs More Affordable

2023-04-19 17:36:09 ET

Summary

• Defying anti-EV pundits who pushed the "not enough lithium" narrative, the price of lithium has dropped 50%-plus over the past six months.
• That drop has resulted in the key component of EVs - the battery pack - to fall.
• And that has made EVs much more affordable. Indeed, Tesla has reduced prices six times so far this year.
• More affordable EVs should translate into higher sales, making the thematic Amplify Lithium & Battery Technology ETF potentially attractive for long-term investors.
• Today, I will take another look at the BATT ETF to see if it is worthy of an allocation within your portfolio.

As mentioned in the bullets, the price of lithium has dropped precipitously (50%+) over the last six months (see graphic below). Lithium, of course, is the key metal in manufacturing lithium-based battery packs for EVs. The battery-pack can equate to as much as 30%-40% of the cost of an EV. As a result, the prices of EVs are coming down. Indeed, Tesla (TSLA) already has cut the price of its EVs six times this year. Some of that reduction is in response to increasing competition from Chinese EVs, but much of that reduction is likely because the price of battery packs have declined. The combination of more affordable EVs and still relatively high oil and gasoline prices will likely mean a further acceleration of EV sales this year. That obviously means increased demand for more lithium and more batteries. That being the case, and even though the Amplify Lithium & Battery Technology ETF ( BATT ) is down 8% since my January Seeking Alpha article on the fund (likely due, in part, to the collapse in lithium prices since then ...), today I will take a fresh look at this thematic investment to see if an allocation of capital might make sense for your portfolio.

Investment Thesis

As you all know, EV sales are booming. Last year, global EV sales increased by 60% yoy and went over the 10 million mark for the first time. What might not be as well known - especially given the false narrative pushed by the anti-EV crowd - is that the cost of EV battery packs have declined for years:

Indeed, and just like solar and wind and most other clean-technology, battery packs on a per kWh basis have declined as manufacturing efficiencies have evolved due to increasing volume and additional research. That bodes well for the future of the EV transition. With that as background, let's take a look at how the BATT ETF has positioned investors for success moving forward.

Top 10 Holdings

The top 10 holdings in the BATT ETF are shown below and were taken directly from the Amplify BATT ETF webpage , where you can find more detailed information on the fund:

The top 10 holdings equate to what I consider to be a relatively well-diversified 43.6% of the entire 106-company portfolio.

In aggregate, the two leading EV makers on the planet, Tesla and BYD ( OTCPK:BYDDY ), equate to 13.7% of the BATT portfolio. Together, these two companies put over 3 million new EVs on the road last year and they will no doubt significantly exceed that number this year.

As outlined in this article in Investor's Business Daily, BYD's sales soared last year:

That may be one reason why Tesla recently cut its prices yet again. Yesterday, Tesla cut U.S. prices: cutting the Model Y by $3,000, starting at $46,900. The base Model 3 price was cut by $2,000, to $39,990, bringing it under the important $40,000 mark for the first time. These cuts come after Tesla cut U.S. prices on all its models on April 7 - including $5,000 cuts on the Model S and X.

China-based Contemporary Amper is the #3 holding in the BATT ETF with a 6.4% weight. CATL, as it is typically referred to, is the #1 global supplier of EV batteries with a 37% share of the global market.

South Korea based LG Chemical ( OTCPK:LGCLF ) is the second biggest EV battery supplier and is the #6 holding with a 3% weight. In January, LG Energy and Honda ( HMC ) announced a joint-venture to build a $3.5 billion battery plant in the United States.

Metals miners BHP ( BHP ) and Glencore plc ( OTCPK:GLCNF ) have an aggregate weight of 12% in the fund. Both companies are lithium suppliers but also have significant copper production - also a key component in EVs as copper is used for the windings on electric motors.

Panasonic Holdings ( OTCPK:PCRFY ) rounds out the top 10 holdings with a 1.7% weight. Earlier this week, Panasonic - a supplier of batteries for Tesla - announced it was building its third U.S. battery plant, this one in Oklahoma. Panasonic also is reportedly in talks with Stellantis (STLA) and BMW about building a new EV plant in North America.

The BATT portfolio as a whole has allocated the most capital to the EV, battery technology, and lithium sub-sectors:

Performance

As of March 31, 2023, the BATT ETF has an impressive three-year average annual return of 26.75%:

However, on a long-term basis - and since the fund's inception in 2018 - the returns have been abysmal (-6.7% annually). That said, clearly things have changed since 2018, and the EV transition is now in full-swing.

The graphic below compares the three-year total returns of the BATT ETF with its primary competitor: the Global X Lithium & Battery Tech ETF ( LIT ):

Clearly the LIT ETF is running rings around the BATT ETF - nearly doubling its three-year returns.

Risks

The BATT ETF has a relatively high expense ratio of 0.59%. In addition, the ETF has 29% of the fund invested in China-based companies - 11% more than is invested in U.S. based companies. With increasing US/China trade tensions, combined with military escalations swirling around Taiwan, the allocation of such a large percentage of capital to China could turn into a big issue relatively quickly.

Summary and Conclusions

The BATT ETF is interesting, but its performance track record significantly lags its primary competitor: The LIT ETF (see LIT: End-of-Year Selling Makes Lithium/Battery ETF Attractive ). That being the case, I'm downgrading BATT from a BUY to a HOLD while reiterating my BUY rating on the LIT ETF. After all, commodity prices are cyclical and one could argue that with the collapse in lithium prices, now might be a good time to invest in LIT. However, I caution investors that the LIT ETF also is a relatively high risk/reward opportunity because it has even more of its portfolio allocated to China ( 36% ) and a higher expense ratio as well (0.75%). However, as shown earlier, the LIT ETF's strong performance appears to justify the additional risk and expense.

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