ETFs Crowd Into Chinese Electric-Car Space

Small Electric Car


How much is too much?

Mainland Chinese investors will surely be asking themselves that question with the introduction of not one but five ETFs, all crowding into the electric-car space in China. U.S. investors also have a widening array of choices.

The AXA SPDB Intelligent Electric Vehicles ETF (SH:56000) started raising money in September for its Shanghai listing, created by a joint venture between the insurer AXA and the Shanghai Pudong Development Bank.

It will take its place on the Shanghai Stock Exchange alongside the E Fund CSI Intelligent Electric Vehicles ETF (SH:516590), the Taikang CSI Intelligent Electric Vehicles ETF (SH:159720) and the CCB Principal CSI Intelligent Electric Vehicles ETF (SZ:159710).

A fifth product, the Hwabao WP CSI Intelligent Vehicles ETF Fund (SH:516380) is currently also raising money for a launch. It’s from the Warburg Pincus joint venture in China.

For international investors, the Global X China Electric Vehicle and Battery (ETF HK:2845) is a Hong Kong-listed product that would be easier for people outside mainland China to access. It debuted in January 2020, making it a veteran in this small sliver of a sector. It’s also the largest China-focused product, with US$983.5 million in assets under management, and run by the Korean brokerage Mirae Asset Global Investments.

Another Hong Kong listing, the CSOP Global Smart Driving Index (ETF HK:3162), listed in August. But it tracks the Solactive Global Smart Driving Index, with an international scope that means its largest weighting is to Tesla (TSLA) , with allocations both inside China and to companies such as Texas Instruments (TXN) and Uber Technologies (UBER) .

The China-focused products are planning for the future. China is already the largest market for new-energy vehicles as well as regular combustion engines. And the country has a major commitment to alternative sources of power.

The Beijing government has a masterplan for the development of new-energy vehicles, which calls for them to account for 20% of total vehicle sales in China by 2025. Only through the development of alternative-energy sources can China go from a “major” automobile country to a “powerful” automobile country, the paper issued by China’s State Council in October last year states.

The underlying index for directly China-focused car funds is the CSI Intelligent Electric Vehicles Index, which the company China Securities Index created way back in 2009. Besides the carmakers themselves, the index and its 50 constituents also include companies along the supply chain, including semiconductor suppliers, lithium extractors and Artificial Intelligence specialists.

In fact, there are an enormous 321,000 companies in the broad “new-energy vehicle” category, according to the market-research tracker Qichacha. The bulk are based in Shenzhen and Guangzhou, just across the border from me in Hong Kong, or in Shanghai, China’s auto hub.

Besides the CSI index, there’s also the Solactive China Electric Vehicle and Battery Index, launched in 2017 by the German index tracker Solactive. It restricts itself to 20 stocks, also all mainland listings.

The Solactive index caps its maximum weighting at 9.0%, allocating that to five companies: BYD; Shenzhen Inovance Technology (SH:300124), which makes powertrains for e-vehicles; the lithium-ion battery maker Contemporary Amperex Technology (SH:300750); lithium-battery maker EVE Energy (SH:300014); and lithium smelter and extractor Ganfeng Lithium (HK:1772) (SZ:002460).

The CSI index does not cap allocations, weighting instead by market capitalization. That leaves it with a 16.9% allocation to Contemporary Amperex Technology, and 10.9% to BYD. Battery-film maker Yunnan Energy New Material (SZ:002812), chip-and-circuit maker Will Semiconductor (SH:603501), EVE Energy and Ganfeng Lithium are the only other companies with an allocation above 4% of the index.

A whole lotta lithium! Although lithium-ion batteries are currently key to the electric-car market, lithium batteries are used in a whole host of products. Yunnan Energy also has an extensive business in paper and packaging, meaning it’s far from exclusively focused on vehicles. What’s more, new-energy vehicles are experimenting with other kinds of energy sources such as sodium-ion batteries, lithium-iron batteries and of course hydrogen.

What the two China-focused indexes do not include is any company listed outside the Shanghai and Shenzhen mainland exchanges. That rules out the three U.S.-listed electric-car producers: Li Auto (LI)  (HK:2015), NIO (NIO) and Xpeng (XPEV)  (HK:9868).

All three have the specter of deteriorating U.S.-China relations haunting them. While there’s been no direct pressure on the companies as of yet, they do operate in a consumer-facing industry that can generate reams of data, particularly from smart cars, leaving them subject to political pressure. The current state of play favors delisting or downplaying U.S. stocks in favor of a relocation to a market such as Hong Kong.

Warren Buffett-backed BYD (HK:1211) (SZ:002594) and BYDDY does make the mainland indexes, since it has Hong Kong, Shenzhen and U.S. listings. In fact, the company has two over-the-counter U.S. listings, with an ADR under BYDDY, and an equivalent of its Hong Kong-listed H shares in the form of BYDDF. They should trade identically, although the ADR is likely easier to access through U.S. brokerages.

A safer way for U.S. investors to play the China electrification theme is through the KraneShares Electric Vehicles & Future Mobility ETF (KARS) . Tracking the Bloomberg Electric Vehicles Index, it has around 15% of its portfolio allocated to Chinese automakers, according to ETF Database.

The Global X Autonomous & Electric Vehicles ETF (DRIV) tracks the Solactive Autonomous & Electric Vehicles Index, the same as one of the Hong Kong-listed products. That gives it only a 4.7% weighting to China, with 60.5% allocated to U.S. companies and another 8.8% to Japanese manufacturers.

There’s also the Fidelity Electric Vehicles and Future Transportation ETF (FDRV) , which just launched, on Oct. 7. It tracks the fund manager’s proprietary Fidelity Electric Vehicles and Future Transportation Index. The fund has started with a pretty balanced allocation to 49 companies, the largest positions at 5.2% to Uber and 5.0% to Tesla. NIO, Li Auto and Xpeng account for a combined 7.8% of the exposure.

Electric vehicles are as exciting as it gets when it comes to manufacturing stocks. Electric vehicles currently accounted for 2.9% of the global vehicle market in 2020. That share should rise to 55% of new-car sales by 2040, when 33% of the global car fleet would be electric, according to Bloomberg New Energy Finance.

Investors the world over want to ride the next Tesla all the way to the top of the market. For good reason. TSLA’s five-year return is 1,950.2%! The earliest investors have gains in the order of 20,000%.

Still, it’s been a rather disappointing year so far for a more-mature TSLA. The shares are down 8.3% from a peak they reached on Jan. 26. That selloff saw its stock fall from US$883.09 to US$563.46. on May 19, a fall of more than one-third. They’ve made steady progress since then, breaking back above US$800 this month.

Buffett bet on BYD in China in 2008, around the time Tesla introduced its Roadster. BYD shares have gained 1,846% since then. Of course, Tesla, with its Shanghai plant in production as of October 2019, is also now betting big on China, too.

It’s the best shot in search of Tesla-like gains to look to producers selling to Chinese car buyers. Given the very high single-company risk in this space, an exchange-traded fund is the most-sensible way to access the sector. Investors now have a fast-expanding universe from which to select.

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