2024-01-08 19:01:43 ET
Summary
- The Amplify Lithium & Battery Technology ETF focuses on companies involved in battery metals production, EVs, and battery technology and manufacturing.
- However, battery metals pricing is currently very weak, and the supply of key battery metals is expected to continue to outpace demand in 2024.
- Falling battery prices are good for consumers as EV prices are falling. But that is not good news for #2 holding Tesla, which has seen margins and earnings drop significantly.
The portfolio of the Amplify Lithium & Battery Technology ETF ( BATT ) is a collection of companies that generate a significant amount of their revenue from the development, production, and use of lithium battery technology. These include battery metals & materials producers, providers of battery storage solutions, and EV manufacturers. This would seem to be a bullish investment thesis considering the acceleration of global EV sales. However, the prices for battery metals have been very weak, and are not expected to rebound in 2024. That being the case, the outlook for the BATT ETF is quite bearish in my opinion.
Investment Thesis
As you know, global EV sales are accelerating at a rapid pace:
InsideEVs.com
InsideEVs.com reports that plug-in electric vehicle sales now average ~1.3 million vehicles per month while total BEV sales in 2023, through October, were +38% YoY. Investing in a thematic battery ETF would seem to be a no-brainer, right? Not so fast.
An article in the Wall Street Journal this weekend reported that despite booming EV sales, an oversupply of battery metals has led to plummeting prices:
Wall Street Journal
This is obviously great news for EV consumers and is arguably one reason for significant EV price cuts this year - the primary factor being increased competition). And, you might say that low current battery metal prices would be a great time to buy a thematic battery ETF. However, the same WSJ article referenced above quoted Kwasi Ampofo, head of metals and mining at Bloomberg NEF, as saying that pre-Covid supply concerns caused producers in China and Australia to significantly ramp up supply. However, demand did not keep up:
We did not come out of Covid with a bang as expected. The outlook is quite bearish.
That is, the supply of all three key battery metals (lithium, nickel, and cobalt) is expected to outpace demand in 2024. With that as background, let's take a closer look at the BATT ETF and see if it is positioned to take advantage of these dynamics.
I have covered BATT in the past on Seeking Alpha. I rated the ETF a HOLD back in April on the thesis that falling battery prices would be good for the EV makers the fund held. That didn't work out too well as the fund is down 20% since that article was published (see BATT: Falling Lithium Price Makes EVs More Affordable ). Today, I'll take a fresh look at the ETF and see if much has changed.
Top-10 Holdings
The top-10 holdings in the BATT ETF are shown below and came directly from the Amplify BATT ETF webpage , where you can find more detailed information on the fund:
Amplify ETFs
The #1 holding with a 7.8% weight is BHP Group ( BHP ), a global mining giant that has nickel mining, smelting, and refining operations. The company also produces copper, zinc, uranium, gold, and silver. BHP currently yields 5.2% and is +4.25% over the past 12 months, significantly trailing the S&P500's gain of 23%+.
EV maker Tesla ( TSLA ) is the #2 holding with a 7.1% weight. Tesla stock more than doubled over the past year. However, a slide below from the Q3 report shows that despite rapidly falling battery metals prices, Telsa did not benefit as its margins and earnings actually dropped significantly YoY:
Tesla
As you can see, Tesla's operating margin dropped a whopping 9.6 percentage points while GAAP EPS fell dramatically (44%) to only $0.53/share. Kind of hard to rationalize the stock doubled in the face of those numbers, but - hey - that's what makes a market.
One reason Tesla's financial performance deteriorated so significantly is ongoing pressure from China EV maker BYD ( OTCPK:BYDDY )( OTCPK:BYDDF ), the #4 holding in the BATT ETF with a 4.9% weight. As CNBC reported , the company that Musk once laughed off has overtaken Tesla as the world's largest EV maker. Indeed, one reason often cited for Tesla's significant fall in margins was the price cuts Musk had to make in order to move inventory in China due to strong price competition from BYD .
The top-10 holdings in the BATT ETF also have a number of companies that have specialized EV battery manufacturing operations: Contemporary Ampere, LG Energy Solutions, Panasonic ( OTCPK:PCRFY )( OTCPK:PCRFF ), and Samsung ( OTCPK:SSNLF ). In aggregate, these companies equate to 14.4% of the portfolio.
From a total portfolio perspective, the BATT ETF is most exposed to the EV, Battery Technology, and Nickel industries:
Amplify ETFs
Performance
The long-term performance track record of the BATT ETF is shown below:
Amplify ETF
As can be seen from the chart, the BATT ETF has been one terribly performing investment. Yet it is certainly not alone. As the chart below shows, the BATT ETF - along with peers the Global X Lithium & Battery Tech ETF ( LIT ) and the WisdomTree Battery Value Chain and Innovation Fund ETF ( WBAT ) - have all significantly lagged the S&P500, as represented by the Vanguard S&P 500 ETF ( VOO ), over the past 3-years:
Risks
Risks going forward include continued EV price competition and resulting pressure on EV makers - especially the #2 holding Tesla, whose stock price has arguably and massively out-performed its underlying fundamentals and financial results. Note that TSLA currently trades with a very rich forward P/E of 74.6x.
Upside risks include a possible recovery in metals prices sooner than currently forecast. Indeed, Daniel Sullivan of Janus thinks lithium prices appear close to a bottom .
Risks specifically to the BATT ETF are that, with assets under management of only $105 million, this ETF is relatively ill-liquid, leading to wide bid/ask spreads. In addition, the 0.59% expense fee is sky-high, especially given the fund's terrible performance.
Unlike many fund managers, Amplify does not publish valuation metrics for BATT ETF portfolio. The top holding, BHP, currently has a Seeking Alpha valuation grade of "B". Not surprisingly, the #2 holding, Tesla, is currently assigned an "F" valuation grade . Meantime, it is very difficult to get valuation metrics - at least those you can have a high degree of confidence in - in the Chinese holdings in the BATT ETF.
Speaking of China, the BATT ETF has ~28% of assets tied up in China. That makes sense from a strictly battery thematic standpoint as China still dominates the global EV and global battery supply chains. Yet from an American investor's standpoint, it certainly adds an element of geopolitical risk due to ongoing trade tensions between the two countries and the potential that they could get even worse if China President Xi decides to invade Taiwan, which in my opinion would be disastrous not only for the BATT ETF, but for global markets in general.
Summary & Conclusion
As the years go by, I find myself less and less inclined to make direct thematic investments. The BATT fund is another case-in-point: a seemingly can't-miss bet on booming EV demand, yet a significant under-performer because all the supply worries that made headlines for years simply did not come to fruition. Don't get me wrong, the current environment of very low prices for lithium, nickel, and cobalt could certainly turn around as EV demand remains robust. However, the commentary from commodities traders is still negative and indicates that any big turn-around in 2024 is highly unlikely.
I rate BATT a STRONG SELL and suggest investors simply sell it and move the proceeds into a nicely diversified indexed fund like ((VOO)) or the Nasdaq-100 ( QQQ ). In the metals arena, I continue to favor the long-term prospects for copper and a company like Freeport McMoRan ( FCX ). Copper prices have held up much better than lithium, nickel, and cobalt. Not only that, while the primary thesis for investing in FCX is certainly copper, the company also produced 532,000 ounces of gold in Q3 .
I'll end with a 5-year price chart of Freeport McMoRan followed by a 3-year chart of the price of copper:
MarketWatch
For further details see:
BATT: Falling Metal Prices Great For EV Consumers, Headwind For ETF