TSLA - LIT: End-Of-Year Selling Makes Lithium/Battery ETF Attractive

Summary

• The Global X Lithium & Battery Tech ETF is down 30% this year. The selling in Tesla and anything EV related continues unabated during year-end tax loss selling.
• However, the end-of-year selling (LIT is down 11.5% over the past month) might be a good reason why the LIT ETF may outperform next year.
• The expense ratio is 0.75%, the #1 holding is lithium producer Albemarle (10%), and the five-year total return is 50%-plus.

The 2022 bear market has severely mauled many EV-related stocks and ETFs. Even industry leader Tesla ( TSLA ) has come crashing down to Earth (see below). The Global X Lithium & Battery Tech ETF ( LIT ) has certainly not been an exception and is down nearly 30% this year - and down 11.5% over just the past month. However, this end-of-year sell-off may have created an excellent entry point for investors that see the excellent long-term potential in the EV and EV-battery space as quite attractive.

Investment Thesis

The investment thesis here is simple, obvious, and yet quite compelling: EVs are expected to be 50%+ of new vehicle sales in the U.S. come 2030, while globally that jumps to 60% of sales . Ford's ( F ) biggest problem with its pivot to EVs like the F-150 Lightning and the Mustang Mach-E is that it simply can't keep up with demand. Add to that the fact that the Biden Administration's IRA Act (which I prefer to call the " Clean-tech Act ") has directed $10s of billions of tax-credits toward building out and re-shoring EV and battery manufacturing and supply chains.

So, let's take a look at the LIT ETF to see how it has positioned investors to prosper going forward.

Top-10 Holdings

The top-10 holdings in the LIT ETF are shown below and were taken directly from the Global X LIT ETF homepage , where you can find much more information on the fund. These top-10 holdings equate to what I consider to be a relatively concentrated ~55% of the entire 47-company portfolio:

The No, 1 holding is a leading lithium producer Albemarle ( ALB ) with a 9.5% weight. On a relative basis, ALB stock has held up rather well this year (-8.2%). This week, Albemarle announced it was going to invest $180 million to establish the Albemarle Technology Park in Charlotte, NC. Lithium prices are expected to climb given the strong EV and battery manufacturing incentives in the Biden Clean-Tech Act. The governments of China and the EU are also supportive of EVs and have instituted strong incentives as well.

ALB generated $7.50/share of non-GAAP earnings in Q3 and the CEO Kent Masters commented on the results:

We had an outstanding quarter driven by strong demand for lithium-ion batteries. As one of the world's largest producers of lithium, we are well positioned to enable the global energy transition. With our acquisition of the Qinzhou lithium conversion plant in China and mechanical completion of our Kemerton II expansion in Australia, we are on track to more than double our lithium conversion capacity compared to last year.

ALB currently trades with a forward P/E of only 10.2x, significantly below that of the broad S&P500. In my opinion, the LIT fund is smart to have ALB as its #1 holding.

Note that the price of lithium has been trending lower since late spring and is likely due to bounce as China begins lifting its zero COVID restrictions:

China-based BYD ( OTCPK:BYDDY ) is the No. 5 holding with a 5.3% weight. Investors Business Daily recently reported that BYD has arguably took over the global EV leadership role from Tesla this year:

Including plug-in hybrids, BYD has surged past Tesla sales. It's closing the gap on BEVs, with sales soaring yet again in November. BYD continues to open new plants, with plans for its first factories outside China, including Thailand, Brazil and, soon, Europe.

This is likely one reason why Tesla has struggled so much this year: New competitors like Ford and BYD are nipping at its heels, and that competition will likely cause sales and margin compression for Tesla going forward. Note that Tesla only has only a 2.8% weighting in the LIT portfolio. Other EV-makers in the LIT portfolio are Rivian ( RIVN ), with a 3.0% stake, and 1.3% in Lucid ( LCID ).

Japan-based TDK Corp ( OTCPK:TTDKY ) is the No. 7 holding with a 4.7% weight. TDK is a global electronics solution provider that operates through four segments: Passive Components, Sensor Application Products, Magnetic Application Products, Energy Application Products, and Other segments. Q2 results released in November saw revenue rise 29% yoy. The Energy Application Product Segment results were better than consolidated top-line growth with sales up 38.5% yoy. Those results were driven by expanding demand for medium-sized rechargeable batteries for residential energy storage systems:

From an overall portfolio allocation perspective, the following graphic illustrates the sub-sector investments and country concentration:

As you can see, the portfolio is most highly concentrated in the Materials and Consumer Discretionary sectors. In addition, at 34% of the LIT portfolio, the fund is more highly exposed to Chinese companies as compared to the U.S. (only 25.1%).

Performance

The LIT ETF has an admirable five-year average annual return of 14.2%:

The graphic below compares the three-year returns of the LIT ETF with its competitor the Amplify Lithium & Battery Technology ETF ( BATT ):

As you can see, the LIT ETF has run rings around the BATT ETF.

Risks

The risks of investing in the LIT ETF include the potential that high inflation and rising interest rates could lead to a global economic recession and falling oil demand. That could cause price of gasoline at the pump to decline and perhaps make consumers less likely to purchase an EV.

As mentioned earlier, this fund is quite heavily invested in - and exposed to - China. That obviously brings up the potential that China President Xi could - any time he wants - cut off China's EV battery-suppliers from delivering materials and/or finished batteries to the U.S., or simply "privatize" them. Foreign holdings also increase the potential for foreign currency headwinds considering the strength of the U.S. dollar. However, that could turn into a tailwind if the U.S. dollar were to decline further from its recent high - which appears to have been put-in back in September:

Summary and Conclusion

The LIT ETF has been mauled by the 2022 bear market and is down roughly 30% over the past year. But that might be a great opportunity for investors to take advantage of the current bout of end-of-year tax-loss selling with a nice entry point. Although I don't like the high 0.75% expense fee, given the fund's global holdings and diversification, it may well be worth the extra management costs for investors to obtain foreign diversification it might not otherwise gain exposure to. I'm going to go out on a limb and suggest that the LIT ETF is relatively attractive here and that it will outperform next year. LIT is a buy.

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