BYDDY - LIT: Invest In EV Trend While Eliminating Company-Specific Risk

2023-04-21 17:13:43 ET

Summary

• With the steep sell-off in lithium carbonate spot price most likely at or nearing an end, this is a good potential investment entry point into the lithium mining sector.
• Global X Lithium & Battery Tech ETF offers investors a chance to reduce company-specific potential risk, making it more of a lithium price trajectory play.
• Given that, I am already invested in three lithium mining stocks. I intend to keep this ETF in reserve in case the volatile lithium market continues to plunge further down.

Investment thesis: While there is no way to tell when the currently cratering lithium prices will stabilize and reverse course back higher, the time seems about right to start building a position in lithium mining stocks. So far, I picked three lithium mining stocks that I invested in recently. They all come with certain potential benefits and risks specific to a company's situation and operations.

Global X Lithium & Battery Tech ETF ( LIT ) offers an alternative to picking lithium mining stocks, by providing investors with a bundle that should arguably make lithium battery demand the main driver of performance, rather than a combination of the price of lithium and the specifics of any given miner, battery producer, or EV maker. As such, I find it to be an intriguing investment opportunity that I intend to potentially consider in the near future.

About the LIT ETF

There are currently 40 holdings in the Global X Lithium ETF , with Albemarle Corporation ( ALB ) being the top holding with about 8.5% of the fund's total share currently. Aside from mining companies, it provides a wide range of electric vehicle ("EV") exposure, ranging from Tesla, Inc. ( TSLA ), and BYD Company Limited ( BYDDF ) ( BYDDY ) to battery producers such as Samsung Electronics Co., Ltd. ( SSNLF ), which is indeed a major EV battery producer, but it also makes many other things. Overall, the fund is designed to mostly react to the global EV growth trend. It does not tie it specifically to the fate of miners, but it is rather a mix comprising the entire EV supply chain, with some added exposure to other industries, such as electronics, as is the case with Samsung for instance.

Other aspects of note include the expense ratio of .75%, which just slightly eclipses the dividend rate, which is currently at about .6%.

As far as its share price performance, it went from an all-time high of over $95/share in the fall of 2021, to the current price of just over $60/share currently.

It is important to highlight the fact that this lithium & battery exchange-traded fund ("ETF") saw its share price decline, just as lithium prices had by far the best year ever last year, and potentially perhaps the best year ever, even going forward, at least for the foreseeable future. In other words, it is more complicated than just looking at lithium price trends. However, I still intend to use the movement in the lithium spot price as a guide as to when it might be time to invest in this ETF, for reasons that I will explain.

Explaining the movement of Global X Lithium ETF relative to lithium prices and the overall EV trend

The main reason why the ETF did relatively poorly even as lithium prices rallied last year to an average price level that might never be seen again in any year going forward in real terms, is because most of the fund is not tied to lithium miners. Albemarle may be its top holding, but the materials sector of the ETF is less than half. It is important to understand that due to the relatively poor performance of the EV-related stocks since the fund saw its all-time price peak, the materials sector of the ETF was even smaller in proportion to the rest.

Looking at Tesla, Inc. stock price performance relative to the Fund's performance as a way to correlate, both saw their all-time high price occur in November 2021.

The difference is that the fund saw a roughly 1/3 decline in its share price since then, while Tesla's stock is down by about 2/3 for the same period.

While there was a break in the positive correlation between lithium mining stocks and EV producers, especially between the fall of 2021, and the fall of 2022, it does not mean that the trend will be permanent. At some point, perhaps rather soon, the correlation will become positive again, and the turning point will probably be preceded by a reversal of the current plunge in lithium spot prices.

I am not certain at what point we are likely to see a stabilization in the lithium market and at what level it will happen. It will probably come when we will start to see some lithium miners starting to slow down their capital spending in response to the declining price, which is something that is impossible to predict. In my view, there is a small but not implausible chance that we might breach the lows in lithium carbonate prices. The way I see it, companies are forward-looking entities, and perhaps most of them will just figure that since the lithium market has been so volatile, there is no need to respond by slowing down investment in mining because the price will recover soon, thus some extra production in the pipeline might not be such a bad thing.

If lithium prices stay lower for longer, it can benefit companies on the battery and EV production side of the equation, therefore it might be the case that this ETF will see a flatline in its share price. It should be noted however that the latest news on Chile looking to nationalize its massive lithium industry, coupled with other South American nations looking at forming a lithium cartel of sorts as well as other potential decisions that might be forthcoming. This could leave the likes of Albemarle squeezed on the lithium supply side, with battery and EV makers on the other side of the equation potentially getting squeezed by higher lithium prices.

Investment implications

Given the latest news in regard to the lithium industry, specifically, the way that things seem to be shaping up in Chile and possibly in all of Latin America, the concept of playing the continuing rise of the EV trend through an ETF such as Global X Lithium & Battery Tech ETF seems increasingly appealing. The EV phenomenon is one of the greatest growth stories that the market currently has to offer. However, we live in an increasingly unstable world, with financial, geopolitical, social, and economic issues, frictions, and uncertainties all presenting investors with an increasingly saturated minefield that requires careful evaluation of risk/reward, for any individual investment opportunity. It also requires careful management of portfolio risk, by among other things making sure to avoid over-exposure to any particular company. Out of the roughly 25-30 stocks that I have in my portfolio at any given time, at least 20 of them made up less than 3% of my total portfolio at the time of purchase at any given time.

An ETF with 40 names on the holdings list arguably automatically provides that extra little bit of risk reduction that comes with any of the 40 stocks represented in the fund. As I write this, my recent three lithium mining investments, namely Albemarle, Sociedad Química y Minera de Chile S.A. ( SQM ), and Lithium Americas Corp. ( LAC ) are being negatively impacted by the very recent news about Chile. The impact might last beyond the initial reaction to the news. It may not be the case with this ETF, given its diversification across the EV supply chain. It is a perfect example of where Global X Lithium & Battery Tech ETF might serve as a more enticing potential investment choice for the more risk-averse. While I am not yet buying, the Global X Lithium & Battery Tech ETF is definitely a potential buy for me in the near future.

For further details see: