Future Mobility

The Unstoppable EV Ecosystem & How To Invest

By Anthony Sassine, CFA and Henry Greene

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Introduction

The past two years have seen tremendous excitement in the global electric vehicles (EVs) industry as new companies listed shares, Tesla was added to the S&P 500, global governments stepped up electrification commitments, and electric vehicle sales soared, especially in China and the EU. While the share prices of top names in the industry have continued to rise, we believe investors may also benefit from a comprehensive representation of the entire electric vehicle (EV) ecosystem. That is why we teamed up with Bloomberg to bring you the KraneShares Electric Vehicles & Future Mobility Index ETF (Ticker: KARS). In what follows, we discuss the major trends impacting the global EV industry and ecosystem and why we believe KARS is the best representation of the ecosystem.

2021 Recap

Electric vehicle sales and adoption momentum did not skip a beat in 2021, which has seen triple-digit sales growth as Q2 global sales registered yet another record quarter.1 Our recent conversation with BYD management pointed to more growth in 2022, during which the company is projecting a potential 180% growth in its EV and plug-in hybrid electric vehicle (PHEV) sales. In the US, Rivian’s IPO injected a much-needed dose of excitement into the electric vehicle pickup truck and SUV markets, which constitute close to 80%1 of total US car sales. Furthermore, governments worldwide continue to reiterate their support for the energy transition by initiating new green policies and, most recently, a joint declaration with car companies at COP26 to ensure all new cars and vans sold are zero-emission vehicles (ZEVs) by 2040 or earlier.2 The electric vehicle ecosystem continues to be one of our top picks for thematic investing going into 2022.

How to Invest: Introducing The KARS ETF

The climate crisis is driving the transition to clean energy. According to the International Renewable Energy Agency (IRENA), we will have to invest more than $130 trillion between today and 2060 to avert a global and social crisis. This is a massive opportunity not only for the Teslas and Nios of the world but also for the whole ecosystem: EVs, EV components makers, battery makers, mining companies, technology and connectivity, hydrogen fuel cells, and charging companies, all of which are represented in the KARS ETF. The fund tracks the Bloomberg Electric Vehicle Index, which employs a comprehensive, balanced, and pure approach to capturing this growth opportunity.

The Electrification Ecosystem

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KARS’ Diversified Industry & Country Exposures

We believe the Bloomberg Electric Vehicle Index is as close as it gets to a pure-play on the global EV and new energy vehicle (NEV) ecosystem. The index is also diversified and balanced in terms of ecosystem components and country. The index avoids investment in big technology and big semiconductor companies, which still derive only a negligible percentage of their revenues from EVs and NEVs. The index also avoids industries with low sensitivity to business conditions related to EVs and NEVs.

Other indices such as the Solactive Autonomous & Electric Vehicles Index and the S&P Kensho Smart Transportation Index represent only a partial exposure to the EV ecosystem and include companies that may be only indirectly engaged in the space.

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The Bloomberg Electric Vehicles Index’s country exposure is also diversified with significant exposure to the US and China. As China is the world’s largest electric vehicle market, we believe any comprehensive EV portfolio should have significant exposure to China.

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Lithium: Only One Piece of The Puzzle

Another option for gaining exposure to the EV ecosystem that investors often consider is allocating to the energy storage and raw materials industry. This approach provides a partial exposure to EVs as it is concentrated and leaves out many automakers and providers of components other than batteries. Furthermore, the Bloomberg Electric Vehicles Index already includes batteries and raw materials as part of a balanced portfolio. 77% of the Solactive Global Lithium Index is included in the Bloomberg Electric Vehicles Index, while only 37% of the Bloomberg Electric Vehicles Index is included in the Solactive Global Lithium Index.

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KARS’ Low Overlap With Major Equity Indexes

With the proliferation of thematic ETFs, investors are increasingly focused on building an optimal asset allocation that captures secular growth themes while maintaining a low overlap and correlation to widely used indices such as the S&P 500 and MSCI All Country World (MSCI AWCI). We believe the KARS ETF is complementary to global equity allocation as it exhibits an overlap of only 3.1%3 with the S&P 500 Index and 2.7%3 with the MSCI ACWI.

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2021 Global Electric Vehicle Market Update

Global EV sales in Q2 reached another record,1 led by China and Europe. EV sales jumped 174%1 (630K EVs sold) in China and 234%1 (~570K EVs sold) in Europe during the second quarter. North America saw a triple-digit growth of 208%1 (160K EVs sold), the highest yet for the region. Strong EV sales were also reported in Japan and South Korea, where sales grew 145% and 110%1, respectively. EVs as a percentage of total vehicle sales also reached a new record in Europe as 17%1 of total cars sold in the European Union were electric vehicles. In China,13% of all vehicles sold in Q2 were electric.1

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China EV Market Update

In China, the SAIC-GM Wuling took some cities, particularly China’s EV Capital Liuzhou, by storm and sold 184,000 cars1 in 2021, outselling Tesla’s model 3. The success of the Wuling is attributed to its affordability and ability to be customized based on clients’ preferences of color, interior, and even cartoon characters such as Pokémon on the exterior. The car costs close to $5,0004, has a top speed of 62 miles per hour, and comes in two ranges, 120 and 170 miles, depending on battery size. Very little technology is included with the car, and it comes with a real key to operate.

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An SAIC-GM Wuling with Pokemon decorations. Source: @粤B卟卟宏

The Wuling allowed SAIC-GM to dethrone BYD as China’s top-selling EV company between 2018 and 20201. However, BYD still tops the charts for EV sales as a percentage of total car sales, which stood at 62%1 in the second quarter. Tesla’s Model 3 ranked second1 in sales in 2021, followed by BYD’s Qin PHEV model.

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COP26 & Transport Day

COP26 dedicated November 10th as transport day. Transportation constitutes more than 14%3 of global emissions and that share is rising fast, which explains the dedication of an entire day to the issue at the UN-sponsored climate summit. The goal was to build consensus regarding the speed of the transition to electrification for road, air, and maritime transportation. 38 countries committed to all sales of new cars and vans being zero-emission vehicles (ZEVs) by 2040 or earlier.2 While the declaration was encouraging, it only covered a fifth of the global car market. Despite the limited direct impact, the conference’s success will also indirectly mean more demand for electric vehicles. Days before COP26, India, Saudi Arabia, and the UAE announced carbon-neutral target dates3. Also, during the conference, the People’s Bank of China (PBOC), China’s central bank, announced a new lending facility for green projects, including electric vehicles, and the US passed its long-awaited infrastructure bill that includes $7 billion for the construction of EV infrastructure and $20 billion to advance research into nuclear and hydrogen as sources of energy.

2022 Outlook

The electric vehicle market continues to show strong momentum. More than 5.6 million EVs1 are expected to be sold in 2021, bringing the total number of EVs on the road to 14 million1 versus 1.2 billion1 internal combustion engine (ICE) cars. 2022 should be an exciting year for the US market as well. We expect GM and Ford to start selling electric versions of the iconic F150 pickup truck5 and Hummer SUV5.

Fortunately, companies seem to be working through supply-side shortages as disruptions have been on the low side so far. More energy storage and chips capacity are expected to come online in 2022 and 2023, easing the currently witnessed shortages. Announced new battery production capacity has more than doubled from 211,800 MWh1 per year in 2019 to 447,910 MWh1 per year in 2021, which is the equivalent to producing capacity for approximately 6.5 million1 Tesla Model 3 Long Range Dual Motor batteries annually.

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Conclusion

The global EV ecosystem has kept the momentum it found in 2020, driven by strong sales growth, new share listings, innovative new product offerings, and support from global governments. As EV adoption shows no signs of slowing anytime soon, we believe the EV ecosystem represents an attractive long-term investment and the KARS ETF is the ideal vehicle for pure, diversified exposure to this exciting investment theme.


Citations

  1. Data from Bloomberg New Energy Finance as of June 30, 2021.
  2. “COP26 Declaration on Accelerating The Transition to 100% Zero Emission Cars and Vans,” UN Climate Change Conference UK 2021. October 11, 2021.
  3. Data from Morningstar as of November 30, 2021.
  4. Data from Bloomberg as of November 30, 2021.
  5. According to company data.

Index Definitions:

Bloomberg Electric Vehicles Index: The Bloomberg Electric Vehicles Index was launched on May 21, 2021, and aims to represent the performance of a set of companies that are expected to derive significant revenues from electric vehicles, energy storage technologies, autonomous navigation technology, lithium, and copper mining, and hydrogen fuel cells.

Solactive Autonomous & Electric Vehicles Index: The Solactive Autonomous & Electric Vehicles Index was launched on January 1, 2001, and tracks the price movements in shares of companies that are (or are expected to be in the near future) active in the electric vehicles and autonomous driving industries. This particularly includes electric vehicle manufacturers, electric vehicle component producers, companies that mine or produce raw materials that are relevant to the electric vehicle and autonomous vehicle technology segment, companies that build autonomous vehicles, and suppliers of autonomous vehicle technologies.

S&P Kensho Smart Transportation Index: The S&P Kensho Smart Transportation Index was launched on December 2, 2016, and is designed to measure the performance of companies focused on autonomous and electric vehicle technology, commercial drones, and advanced transportation systems in the Smart Transportation Sector.

Solactive Global Lithium Index: The Solactive Global Lithium Index tracks the performance of the largest and most liquid companies active in exploration and/or mining of lithium or the production of lithium batteries. The index is calculated as a total return index in USD and adjusted semiannually. The index was launched on April 16, 2019.

S&P 500 Index: The S&P 500 Index or Standard & Poor’s 500 Index was launched on January 1, 1957, and is a market-capitalization-weighted index of the 500 leading publicly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria to be included in the index. The index is regarded as one of the best gauges of large-cap U.S. equities.

MSCI All Country World Index (ACWI): The MSCI ACWI was launched on January 1, 2001, and captures large and mid-cap representation across 23 Developed Markets (DM) and 27 Emerging Markets (EM) countries. With 2,975 constituents, the index covers approximately 85% of the global investable equity opportunity set.

For KARS top 10 holdings, click here.

Diversification does not ensure a profit or guarantee against a loss.

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