For electric vehicles (EVs), 2022 will be a year of dubious distinction. It’s the first since the EV revolution began that the price of a new car or truck is going up, not down.
In a sign of the times, Tesla Inc. (TSLA-Q) has raised its prices twice this year by between 5 and 10 per cent. Rivian Automotive Inc. ( RIVN-Q), the newly public Irvine, Calif.-based electric automaker, has increased the price of its all-electric pickup truck by 17 per cent and its SUV by about 20 per cent. Chinese manufacturers have joined in.
The price pressures include a shortage of lithium and other metals that are essential components of batteries. Nickel has doubled in the past year and lithium has increased 10-fold since 2019. Pandemic-induced supply chain issues are causing shortages of components. Russia’s invasion of Ukraine is also having a yet unknown global economic impact.
For investors, the question is whether to stay clear or stay invested. Consumer demand for EVs remains strong and political will to meet carbon reduction goals means subsidies, such as those announced in the recent federal budget.
“We know the future of transportation is going to be electric,” says Pedro Palandrani, director of research for Global X ETFs in New York. “We know we’re going to get there, so we believe investors are going to be well rewarded over the long term.”
Mr. Palandrani oversees thematic exchange-traded funds (ETFs) including Global X Autonomous & Electric Vehicles ETF (DRIV-Q) with US$1.26-billion in assets under management (AUM) and Global X Lithium & Battery Tech ETF (LIT-A) with US$4.9-billion in AUM.
Elliot Johnson, chief investment officer at Toronto-based Evolve Funds Group Inc., also says the outlook for EVs is strong, even if the short run is challenging.
“Politicians want this to happen and voters want it to happen,” says Mr. Johnson says who oversees Evolve Automobile Innovation Index Fund CARS-T, which has $93-million in AUM.
Mr. Johnson says the selloff in EV stocks came after several strong years, and while the decline has been sharp, “the disruptive trends are not slowing down.”
“That’s a great thing if you have a medium or long-term time investment horizon,” he says.
Rising inflation and interest rates are worrying, but he says investors may overestimate the impact.
The Bank of Canada and the U.S. Federal Reserve Board are gradually raising rates, but he sees rates remaining low relative to long-run averages. That makes stocks more attractive than fixed-income alternatives.
The difference between the ETFs
Evolve and Global X have taken different approaches to EVs. Both invest in traditional and pure EV automakers and companies providing components like batteries and electronics. But Global X includes mega-cap tech companies like Alphabet Inc., whose main businesses lie elsewhere.
Evolve Automobile Innovation Index Fund holds 55 stocks of companies that make traditional cars and EVs, or provide EV automotive components. Its top five holdings are involved in battery technology.
Global X Autonomous & Electric Vehicles ETF has 74 stocks, with a similar focus on manufacturers and components. However, three of its top five holdings (10 per cent of the fund) are Apple, Alphabet and Nvidia Corp. Seven of the top 10 are in this large-cap category.
“We include them because they’re potentially leading players in the autonomous vehicle arena,” Mr. Palandrani says. “If you’re planning to invest directly in the companies that generate or expect to generate most of the revenue from autonomous vehicles, you’re going to have a small handful of companies.”
Mr. Johnson counters that while the “Apples” and “Googles” may be exploring EV opportunities, it will be a small part of their businesses. He adds that many investors already hold them in other parts of their portfolios.
“The car market is not driving their revenue and profit,” he says. “We’re not saying don’t own Apple or Google. But if you want to invest in the future of the automotive industry, adding our fund means you’re not getting duplication that you have elsewhere.”
The different strategies mean that in a year like 2020 when investor enthusiasm for the EVs took off, the Evolve ETF outperformed the Global X ETF because it was more focused. But in 2021 and so far this year, when sentiment changed, the Evolve ETF sold off more because it lacked the mega-cap buffer.
Both analysts see EV demand remaining strong. U.S. President Joe Biden has invoked the Defense Production Act to encourage the domestic production of minerals needed to make batteries for EVs.
Thursday’s federal budget offers incentives for companies to buy electric trucks and extends a consumer EV rebate. The Ontario government is helping Stellantis NV STLA-Nand South Korea-based battery maker LG Energy Solution build a $5-billion EV battery plant in Windsor, Ont.
There’s no quick fix to higher prices because roughly 25 per cent of the cost of an EV is the battery. Bringing battery costs down means more lithium mines and processing plants. They’re coming, but it takes between three to five years from planning and building a mine to getting processed ore to market.
Still, Mr. Palandrani believes momentum favours the sector.
“EV sales are reaching an inflection point,” he says. “We’re seeing innovation and billions in investment. We believe EVs will reach price parity with internal combustion engine cars by 2024.”