KARS - KARS: EVs Are Accelerating

Summary

• KARS provides diverse exposure to the entire EV value chain without overweight exposure to Tesla. I believe it is poised to do well, driven by:
• Increasing demand for EVs as total cost of ownership falls.
• Younger generations are more sustainability-conscious.
• Strong EV sales momentum to continue.
• Technical analysis also suggests bullishness, especially on the standalone KARS chart.

Introduction

I believe the electric vehicles (EV) sector is poised for an acceleration in adoption, driven by continued progress on reduced total cost of ownership, enthusiastic adoption by younger generations who are more sustainability-conscious, and sustained EV sales momentum. The KraneShares Electric Vehicles and Future Mobility Index ETF ( KARS ) is a good way to play this theme as it gives diversified exposure to the entire EV value chain; EV production, autonomous driving, shared mobility, lithium and copper production, lithium-ion/lead acid batteries, hydrogen fuel cell manufacturing and electric infrastructure. It also does not have overweight exposure to Tesla ( TSLA ), unlike some of Ark's Funds ( ARKK ) and ( ARKQ ), which I have also analyzed before .

KARS ETF Exposure Mix

Sector Mix

As KARS has representation at both the original equipment manufacturer (OEM), batteries and other components on the supply side, it is unsurprising that it has broad diversified representation across B2C industries such as Consumer Discretionary, and B2B industries such as Materials, Industrials and Information Technology.

Top 5 Holdings Mix

KAR's top 5 holdings include Contemporary Amperex Technology, Panasonic Holdings ( OTCPK:PCRFY ) ( OTCPK:PCRFF ), Aptiv ( APTV ) ( APTV.PA ), ( OTCPK:NJDCY ) ( OTCPK:NNDNF ) ( OTCPK:OKKCF ).

A roughly equal weight across the top 5 names, broad representation across sectors and an low overall top 5 weightage of 20.4% means KARS is a well-diversified ETF that can be used to bet on the general theme of EVs without taking on meaningful company-specific risks.

Where's Tesla?

Tesla is synonymous with EVs. Yet, it is not in the top 5 holdings. This is a unique feature about the offbeat KARS ETF. Note however, that Tesla still does have representation in KARS, albeit in 8th place with a weight of 2.95% .

Fundamental Drivers of KARS

I am bullish on KARS for 3 main reasons:

1. Increasing demand for EVs as total cost of ownership falls
2. Younger generations are more sustainability-conscious
3. Strong EV sales momentum to continue

Increasing demand for EVs as total cost of ownership falls

It is a well-known trend that electric vehicles (EVs) are the future.

According to Morgan Stanley and KraneShares , the volume market share for EVs is expected to rise for EVs at an accelerated pace. This is driven by legacy automakers making the shift to EVs in an effort to meet carbon emission goals. Technological developments are expected to lower the total cost of ownership ((TCO)) of EVs. As Adam Jones , Head of Global Auto and Shared Mobility Research notes:

Over the long run, EV adoption should prove cheaper than staying with internal combustion engines, and ultimately quite profitable.

Indeed, in some countries such as India, which is an oil-importer, the total cost of ownership is now lower than petrol cars. Data from International Energy Agency (IEA) shows that in 2022, the TCO of a battery-powered electric vehicle to be $25,138 ; marginally lower than the petrol-fueled vehicle's TCO of $25,324 .

As these trends continue and EV's relative viability improves, I anticipate companies in the KARS ETF to realize significant business scale expansions.

In addition to a lower TCO, another driver for increased adoption of EVs is a change in generational sentiment:

Younger generations are more sustainability-conscious

According to a World Economic Forum survey, the newer Gen Z places ~13% more importance on a product's environmental sustainability than its brand. This deduces that this has dual implications for our study of EV market implications:

1. Younger generations are more likely to purchase EVs due to their environmental sustainability
2. Younger generations are more likely to be early adopters of new EV models from new EV making companies as they place less emphasis on established brand names

The first impact is direct and obvious. However, I think the second indirect impact's second-order effects may be underappreciated; consumers that are more willing to give new entrants a chance would have multiplicative benefits for the development of the EV industry's supply chain as this expands the number of customers and hence addressable market. Therefore, I believe this too is a powerful tailwind for KARS, which has exposure to the EV supply chain.

Strong EV sales momentum to continue

My approach to investing never invests based on long term structural trends alone. Near term proof of momentum is a critical requirement. In that regard, I note that EV sales momentum is strong across automakers:

In 2022, BMW ( OTCPK:BMWYY ) saw EV sales more than double even though total sales declined by 5%. In the same year, Volkswagen ( OTCPK:VWAGY ) ( OTCPK:VLKAF ) ( OTCPK:VWAPY ) saw overall new car sales fall 7%, but EV sales were up 26% .

The future outlook is rosy too:

We are confident that we can repeat this success next year, because we have a continued high order backlog for fully electric models.

- BMW sales chief Pieter Nota

BMW's CFO confirmed this too in the Q3 FY22 earnings call:

Our order books remain full, in particular for our highly attractive range of all-electric models. Here, we continue to see dynamic growth.

I have no reason to doubt management's bullish commentary on order backlogs. Hence, I maintain a bullish outlook on EV traction.

Technical Analysis

If this is your first time reading a Hunting Alpha article using technical analysis, you may want to read this post , which explains how and why I read the charts the way I do, utilizing the principles of Flow, Location, and Trap.

Relative Read of KARS vs S&P500

On the relative chart of KARS vs the S&P500 ( SPY ) ( SPX ), the ratio price is moving up, but I believe it is not happening at a very logical area. Thus, I would not be surprised if KARS underperforms the S&P500 for a few more months as it falls back towards monthly support, before a genuine alpha move begins.

Standalone Read of KARS

Bulls tested the monthly resistance through 2019 and 2020 before breaking higher. However, by the end of 2021, KARS began a 47% descent as it began to underperform the S&P500 Index. Now, with the price near monthly support, I anticipate a reaction till at least the monthly resistance area.

Takeaway and Positioning

The structural mega-trend of EV substitution seems to be accelerating. For the first time, in major countries such as India, we are seeing the total cost of ownership of EVs cross below that of petrol vehicles. The young Gen Z's enthusiasm for new brands leading to scale up in early adoption, and continued momentum in EV sales by leading automakers leads to a bullish setup for EVs and its supply chain and by extension, the KARS ETF. Additionally, KARS has lower exposure to Tesla, which may be favorable for some investors.

I rate KARS a 'buy' as I anticipate positive absolute returns to result from it. However, I personally would not be buying right now as I am not as convinced that it would outperform the S&P500 at this juncture.

For further details see: