EVX - EVX: Long-Term Opportunity Clouded By Short-Term Challenges

Summary

• EVX is an ETF that tracks the performance of companies with operations in environmental services.
• Growing awareness of environmental sustainability provides new opportunities for this fund.
• My Hold rating is based more on near-term challenges which may delay the long-term success of EVX.

VanEck Environmental Services ETF ( EVX ) has a reasonably balanced allocation of investments from a market capitalization standpoint, providing diversification in company sizes. EVX is uniquely focused on companies with products and services currently in demand due to increasing environmental conservation. Despite that promising concept, near-term headwinds toward the broad stock market could hamper potential future performance for EVX. This ETF is based on a solid concept and has long-term growth potential. However, keeping in mind the risk factors I cite below, I rate EVX a Hold for now.

Strategy

EVX seeks to replicate the performance of its underlying index, the NYSE Arca Environmental Services Index (AXENV). That index tracks the performance of businesses involved in a diverse set of environmental services, including waste disposal, soil remediation, wastewater management, recycling, and environmental consulting. EVX uses a full replication strategy and indexing investment approach to achieve its objective of tracking the index's performance.

Holding Analysis

EVX has 24 holdings, with a concentration at the top. Ecolab Inc. ( ECL ) accounts for about 10% all by itself. And 3 other stocks, Waste Connections Inc. ( WCN ), Republic Services Inc. ( RSG ), and Waste Management Inc. ( WM ) each account for about 9%. The top 3 holdings (see table below) are businesses involved in operations like water treatment and waste disposal.

Close to 60% of total assets are in the top 10 holdings, so that group of stocks has a great influence on how EVX performs.

Assets of EVX are also diversified across 6 sectors, though only 2 of them are big enough to have a significant influence on this ETF's price movement. Industrials comprise 3/4th of the total, and Basic Material accounts for another 12%.

Strengths

What sets this fund apart is its unique focus on companies whose products and services are in demand due to the increasing importance of environmental conservation. Unlike industries that are directly impacted by rising interest rates or inflation, the demand for environmental services is relatively insulated, as the end users are typically businesses rather than individual consumers. Ecolab, the top holding of EVX, is a good example of this trend. Ecolab provides water treatment solutions and chemistries to a range of businesses, including beef and poultry producers, petrochemicals processing, mining and minerals processing, refineries, and other similar operations. Since all of these businesses require water treatment at varying levels, they depend on companies like Ecolab to provide them with solutions.

The fund's portfolio is structured with a reasonably balanced allocation of investments in large-cap, mid-cap, and small-cap companies. This variety in company size may assist in reducing the risks associated with extreme market conditions.

Weaknesses

EVX's high concentration of holdings in the Industrials sector is a risk for any investor that would consider making this ETF a core portfolio position. If anything, it is a role player, given its focus on one investment theme.

According to the table below, only half of the components of EVX actually pay dividends, resulting in an average dividend yield of 0.69%. So dividend yield is not a reason to consider this ETF.

Another disadvantage of EVX is its low assets under management of only around $72mm and daily trading volume of only about $300,000. This lack of liquidity discourages potential investors and reduces the fund's assets. The reason for this could be insufficient marketing or lack of awareness in the market. But EVX has been listed as security since 2006, so it is not small due to not having enough time to generate awareness.

Opportunities

While EVX has holdings in the US and Canada, the constituent companies operate globally. This means that the fund can indirectly benefit from global opportunities, and this is reflected in its performance. Last year, waste management companies that constitute the top holdings of EVX delivered impressive returns, particularly during the bearish market when the S&P 500 was experiencing lows. The same is reflected in the chart below.

A majority of US companies are adopting measures to reduce their carbon emissions. However, in many cases, companies inevitably produce by-products that are harmful to the environment. Therefore, it is essential to process these by-products before releasing them. Additionally, with the increasing global population, the amount of waste generated is also rapidly growing, and this highlights the need for effective waste management. Waste is produced by both individuals and companies, and businesses focused on managing and recycling waste are sought after by other corporations as well as government bodies, which offer them contracts . As a result, EVX could have promising growth prospects ahead.

Threats

Having a max drawdown (5 years) of 41% is a threat for EVX as the high price dip nature in times when the bear markets could hit hard is a big risk. Moreover, deep lows could be spotted in EVX's performance in the last year as well. The chart below shows the price movement of EVX and there is a big difference between the troughs and the crests. Also, this pattern seems to repeat itself, showing a possibility of fluctuation in price in the future as well. While the broad market has had its own ups and downs during the past 14 months, this could be an indication that long-term investors are not committed to this industry as much as they were in years past.

A few components of EVX are companies having a small market capitalization, and thus are likely to be riskier in nature.

Conclusions

ETF Quality Opinion

The overall concept of EVX is impressive. As people and businesses become increasingly aware of the importance of environmental sustainability, there is significant potential for the companies that the ETF tracks. Additionally, the steady demand for the products and services provided by these companies is a marked advantage for the fund.

ETF Investment Opinion

Despite the environmental-friendly concept, there are some factors that could hamper the potential growth and future of the fund. The low assets under management combined with high volatility make me rate it a Hold in this, my initial report on EVX.

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