- The ETF diversifies across the lithium and battery industry by including the most prominent companies in the space.
- More than 100 million electric cars are expected to drive on global roads, a major growth catalyst for the ETF.
- Although valuations remain high, the ETF is well-diversified and thus reduces the risk for investors.
- Considering that LIT ETF is down more than 20% from all-time highs, the dip may be a buying opportunity.
Global X Lithium & Battery Tech ETF (NYSEARCA:LIT) offers investors an opportunity to invest in the global lithium and battery market while diversifying individual risk. The ETF is a market-cap weighted index that tracks 20-40 companies engaging in global mining and lithium extraction for the production of battery cells. Therefore, the fund created by Global X gives investors concentrated exposure to the industry with a micro-cap tilt. The ETF has an average weighted market cap of $76 billion and an expense ratio of 0.75%, representing the initial costs when investing. The ETF also pays a yearly dividend of 0.6%.
The ETF is very well diversified: It includes companies from 10 different countries, concentrating mostly on China and the United States. Now, battery producers and electric vehicle manufacturers had a strong year in 2020 and outperformed the broader market, as shares saw unprecedented demand, especially from the retail sector. However, along with most of the technology market, shares dipped substantially from all-time highs and are now down by more than 20%. Yet when looking at the immense growth in the lithium-ion battery market, the ETF should recover in the long-term.
Thus, the recent dip may be an excellent buying opportunity for investors looking for exposure in the quickly-growing battery production industry and have a certain degree of risk tolerance.
Albermarle Corp. (NYSE:ALB): As the largest holding of the ETF, Albermarle develops, manufactures, and markets highly-engineered specialty chemicals. The company's three main segments include Lithium, Advanced Materials, and Refining solutions. The company, with its joint ventures, operates 31 production and research facilities around the world. Despite decreasing revenue and income, shares of Albermarle are up nearly 160% year-over-year.
Ganfeng Lithium (OTCPK:GNENY): The Chinese-based company engages in the research, development, and production of lithium products. Its main products include lithium compounds, lithium metal, and lithium batteries. These products are mainly used for electric vehicles, chemicals, and pharmaceuticals. The company has both domestic and international operations. Listed on the exchange in Shanghai, the company's shares are up by 126% YoY.
Samsung SDI (OTCPK:SSDIY): As a Samsung Group flagship, the Korean-based company manufactures and distributes secondary batteries. Its energy solution business unit's products include mobile phone batteries, automobile batteries, and power storage devices. The company grew sales by 15% in 2020 and saw shares surge by 185% in a year.
Panasonic Corp. (OTCPK:PCRFY): The Japanese multinational engages in a wide range of electronics. The automotive and industrial systems segment develops, manufactures, and sells products for the automotive motorized systems business. Here, its most prominent client, Tesla, recently announced an extension until 2022 of its agreement for lithium-ion batteries. Shares of Panasonic are up 77% YoY.
Tesla (NASDAQ:TSLA): As the most prominent name in the space, Tesla manufactures electric vehicles and installs and sells solar energy units through its energy business. The company also engages in artificial intelligence, as its integrated software allows its cars to drive autonomously. Although shares are down by 25% from all-time highs, the stock is up by over 500% in one year after a blockbuster year.
The ETF widely outperformed the broader market and competing ETFs as an easy money policy favored growing industries such as those included in LIT. Moreover, growing investor's demand for sustainable companies (especially from the retail sector) further benefitted the ETF's performance. Here, the fund is up by a staggering 165% since last year, while the Nasdaq Index 'only' gained 63%. Its most notable (and similar) competitor, Amplify Lithium & Battery ETF (BATT), gained 131% in comparison. The ETF also focuses on the lithium and battery industry yet has a different approach in terms of its holdings. In this context, the largest holding of BATT ETF is BHP Group, followed by Tesla. As its largest holding is only up by 86%, it explains the discrepancy in performance.
Although Global X Autonomous & Electric Vehicles ETF (DRIV) has a different focus, I thought it'd be relevant to include it as the two ETFs both include technology holdings. The ETF also outperformed the broader technology index yet gained 30% less than LIT. Here, it mainly concentrates on large technology companies, almost inclusively from the U.S., such as Microsoft, Intel, Alphabet, and Apple. From a historical perspective, LIT ETF gained about 80% since its inception in 2010. That would translate to an average CAGR return of about 6%, compared to 10% of the S&P 500 in the same time period.
In accordance with performance, valuations of the included companies have inflated throughout the year. That said, when looking at the valuations of the top 10 holdings, a divergent picture appears. While Ganfeng Lithium and Tesla are trading at over 20x EV to Sales, other holdings are trading below 10 times sales. Panasonic trades at an even greater discount, at just 0.5 times sales, and thus appears quite undervalued concerning its growth potential. Although Tesla is overvalued based on its fundamentals, it arguably deserves a higher premium due to its annual growth rates (+40%) and its lead in tech innovation. On the other hand, companies such as Enersys, BYD, and Albemarle appear near value and might have more upside in the future.
Overall, the ETF has a price-to-earnings ratio of 67, which is higher than the S&P 500's P/E of 40. This is unsurprising and shouldn't worry long-term investors of LIT, as companies in growing industries usually forego profits to invest in long-term growth. I like the ETF composition, balancing out valuations by including both undervalued and overvalued companies.
As mentioned earlier, the companies included in LIT have benefited from the pandemic-induced monetary policy, which caused large inflows towards growth stocks. As a result, the ETF saw its best year since its inception and returned a staggering 170% to investors. However, the most recent drop of nearly 20% demonstrated that the sky is not the limit for these companies despite being in an ultra-growth industry. If the global economy continues to recover in the following years due to a vaccine rollout, a change in monetary policy might result. This could cause investors to reallocate capital towards value stocks with less growth to seek dividends and profitability. The ETF would suffer from such a trend and see performance drop significantly. Moreover, as seen in the historical chart, the ETF has had a wild ride in the last 10 years, which points to high volatility.
Global demand for lithium and complementing batteries is set to increase drastically due to the rapid adoption of electric vehicles in the coming decades. In fact, over 120 million electric cars are expected to drive on global roads by 2030, up from just 5 million in 2020. Unsurprisingly, the global lithium-ion battery market size is expanding to $129 billion by 2027, representing a CAGR of 18%.
I believe LIT ETF is well-positioned to capture this growth by including the most promising companies in the space of the biggest nations in the world. Investors have been rewarded, as the ETF mightily outperformed other ETFs and the broader market. However, the past performance points at high volatility, so any long-term gain will likely come with sharp pullbacks from time to time.
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LIT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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