The odds are that my next car will be an electric vehicle, although I’m not sure which brand it will be.
There’s no shortage of choice as more automakers add EV models. Tesla’s are increasingly affordable. Our 13-year old Volvo has been such a good car we’re thinking of a Volvo EV. Nissan has the Leaf, Chevrolet, the Volt. Ford’s electric Mustang Mach E, won the 2021 Driver’s Choice for Best Performance from MotorWeek. Volkswagen, Audi, Hyundai and Kia all have good products.
The rapid evolution of this industry offers an investment opportunity. One strategy is to look beyond the carmakers and take a peek under the hood of their cars. No matter who wins the race, they all need batteries, charging systems, smart software and computer chips.
Elliot Johnson, chief investment officer at Toronto’s Evolve Funds Group Ltd. notes that a Ford Focus on the lot today has about 300 chips. The Mustang Mach E has about 3,000. The chips are used for infotainment, digital displays, power brake sensors, warning light indicators, and engine management. Some are made by Nvidia (NDQ:NVDA). A leader in charging technology for the gas station of the future is the Swiss engineering giant ABB Ltd., (NYSE: ABB).
For investors, batteries and related charging technology are one place to go. Batteries are the single most expensive component of electric vehicles – about 25 per cent of the total which is why EVs are sometimes jokingly referred to as a battery with four wheels.
Battery costs have fallen dramatically and performance has improved. Mr. Johnson notes that between 2010 and 2020, the price of a kilowatt-hour of capacity in an automobile battery pack dropped by 87 per cent to US$156 from US$1,160.
The key battery considerations are faster charging speeds and rising storage capacity. This extends the distance between charges and helps allay the range anxiety fear among EV buyers. Range anxiety is the worry that a car will run out of charge before you can find a place to plug in, leaving you stranded. Buyers also worry about how long they will have to sit for a recharge if they do find one.
China is the global leader in battery technology. It manufactures about 77 per cent of all battery cells and 60 per cent of battery components. No one is really close. In a sign of the times, Toyota and Stellantis (Fiat, Chrysler, Renault) announced this month they plan to build U.S. battery factories.
Nio Inc. (NYSE: NIO) a Chinese EV company is a name to watch. Nio opened its doors in 2018 and in three years has gone from zero to a US$62 billion market capitalization. It launched in Norway in April, its first foray outside China.
In an example of the sector’s rapid innovation, Nio is eyeing the battery-as-a-service model, where customers can buy the car and pay rental fees for the battery to ensure their vehicle captures all future performance increases.
Evolve’s Automobile Innovation Index Fund (TSX:CARS) was launched in 2017, is passively managed and has 47 stocks. It holds companies that develop EV drive trains and autonomous driving and network services. It has C$112-million in assets.
A little over half the companies are based in the U.S. (53%) with Japan next (9%).
The top three holdings are semiconductor companies, Analog Devices Inc. (4%), SiTime Corp., (4%) and Ambarella Inc. (4%) The fund also holds Tesla, Nio, and Nvidia. Vancouver’s Ballard Power Systems Inc. (TSX: BLDP) a fuel cell developer is another holding.
At the time of writing, year-to-date the fund is up 3.05% and 41.8% in the last 12 months. The management fee is 0.4%.
Global X Autonomous & Electric Vehicles ETF (NDQ:DRIV) was launched in 2018, has 76 stocks and is also passively managed. It also invests in companies involved in the development of autonomous and electric vehicles and EV components. It is much larger with US$1.1 billion of assets.
The strategy is different too. The top holdings are mature tech companies led by Tesla (4%), Alphabet (3%), Nvidia (4%) and Microsoft (3%). The top 10, which account for 30% of the fund, are all tech titans.
As with the Evolve fund, it is heavily weighted towards US companies at 61%, though China rather than Japan is number two (11%).
The fund is up 14.6% year-to-date and 62.8% in the last year. The management fee is 0.68%.
The promise of new technologies lies in their ability to create newer, cheaper and more efficient ways of doing things. Those forces are at work with electric vehicles where prices are falling and battery performance improving.
Picking winners and avoiding the losers is the challenge, so one approach is to focus on the early leaders and hope they maintain their relative advantage. Another is a heavier weighting in established players who have time and resources to invest in new products and the motivation to stay on top.
The Evolve fund is more weighted to the former approach and Global X the latter. Either fund could be considered for the aggressive portion of a portfolio, but as always, should be discussed with your advisor.