Electric Vehicles: Massive Growth but Investment Opportunities Are Elusive

Summary

• President Biden made a big splash with his goal to boost electric vehicles to 50% of US auto sales by 2030. To get there, EV sales will have to grow some 33% annually. That is an exciting growth prospect!
• It is a nice idea, but the path ahead is littered with house-sized boulders, including limited supplies of battery minerals and inadequate planned charging infrastructure.
• Investors must face the reality that EV manufacturing will soon become a commodity business – no Tesla bonanza is waiting.
• EV-related ETFs make little sense. They mostly hold large-cap stocks and generally offer market index returns – with high fees and some volatility thrown in.

Market Implications

• Investors who want EV ETF performance are best served by holding QQQ (NASDAQ 100 ETF) or SPY (S&P 500 ETF).
• Those interested in the EV sector should review holdings of EV ETFs and select the potential nuggets that might post outsized gains in the coming years.

Biden’s EV Goals: Path to Riches or Wishful Thinking?

To reduce greenhouse gas emissions, President Joe Biden has set a goal of boosting US electric vehicle (EV) sales to 50% of total auto sales by 2030. Given normal US auto sales run about 17mn annually, that implies about 8.5mn EVs. For context, EVs in 2022 account for about 6% of auto sales. To meet the 2030 goal, EV sales will have to grow by more than 33% annually.

That growth potential should get investors’ attention! How might one capitalise on this outlook today? In short, nothing is certain. Even if EV production takes off, there is no clear-cut path to supercharged profits.

First, Some Caveats…

Affordability. EV uptake will depend largely on whether attractive and affordable products are available. Today, that combination is in short supply.

Battery Availability. The outlook for the key component for affordable EVs – batteries – is murky. Batteries require copious volumes of minerals – lithium, cobalt, graphite, manganese, and rare earths.

Today, demand for these minerals is already straining available supply. It may be theoretically possible to increase supply to meet 2030 EV production goals, but everything must go right. In the past, it has taken upward of 15 years to bring lithium mines online; that timeline has to be shortened drastically. Further, minerals tend to be located in less stable parts of the world, making disruptions and delays likely. Even if these issues can be overcome, producing cost-effective minerals remains a significant challenge.

Charging Station Shortage. There is a great need for charging stations. Today, there are about 60,000 EV charging stations across the US. The Inflation Protection Act is providing $7.5 bn to build out 500,000 stations by 2030. A recent McKinsey report estimates that at least 1.2 mn charging stations will be required to support Biden’s EV sales goal.

Clearly, there is a big disconnect here. New technology may help sidestep some of these problems, but today that is aspirational at best. It will require an extraordinary effort to transition to EVs as quickly as Biden would like – an effort that, to date, has been little more than talk.

EVs Becoming a Commodity

Another problem for investors is that manufacturing EVs is the same basic business as manufacturing internal combustion engine (ICE) autos. Tesla (TSLA) has been extraordinarily successful because it has been close to the monopoly producer of a desirable product (Chart 1). But every major automaker plans to have a line of EVs within a couple of years. EVs will soon be a commodity business, much as ICE cars are today. That gravity will increasingly be a drag on TSLA’s stock price.

If a boom is to come in the EV sector, it will be in some other corner, whether battery technology or driverless car software. But car manufacturers will be consumers of these developments, not the collector of economic rents.

Investing in EVs Today via ETFs

Investors in EV technology may have to be patient. But it may still come down to picking where lightning strikes – assuming that lightning will strike again and produce another Tesla bonanza. That will be an extraordinarily difficult act to follow.

Still, people are trying. Various ETFs have been created that focus on EVs and related technology, for example, batteries and autonomous driving (Table 1).

We Note the Following:

• Most of these ETFs are new, having been created within the past few years.
• Assets under management are relatively small. All are well under $1bn, with five in the tens of millions range.
• Annual management fees are steep, mostly in the 0.5–0.7% range. However, SPY and QQQ, which track the S&P 500 and NASDAQ 100, carry fees of 0.9% and 0.2%, respectively.

Pay for Performance?

What does that management fee buy you performance-wise? Chart 2 compares the price performance of eight EV ETFs versus SPY and QQQ since year-end 2018. EV ETFs lagged until mid-2020, then took off after the US election in early November 2022. They did so in hopes that the new administration would jumpstart infrastructure and clean energy programmes – and perhaps were riding TLSA’s coattails. But they never achieved the escape velocity that TSLA did for a spell. Rather, they basically tracked the broader market.

There is a reason for that. Even though these EV ETFs are diversified, holding 60–100 companies, large-cap companies account for upward of 60–75% of their portfolios, with midcaps making up most of the balance. We list the largest 30 companies by market cap that appear in several or even most of these ETFs:

It is understandable why many of these companies would be included, even if for some such as Samsung or Amazon or even Taiwan Semiconductor, EV-related technology will most likely be a small part of their overall business and unlikely to move the needle much on their earnings or stock price. Apple and Google are known to be developing autonomous driving software.

But Coca-Cola? Johnson & Johnson? Procter & Gamble? Perhaps these companies have announced plans to upgrade their ICE fleets to EVs and could gain efficiencies. But will every Russell 3000 company not do the same when the technology is available and reap the same efficiencies?

Even if some of these ETFs are holding some EV company that turns into a gold mine, overall performance will be within the orbit of broad market ETFs like SPY or QQQ.

Concluding Remarks

If the makeup of EV ETFs tells us anything, it is that money managers who are most focused on identifying prospects for the sector simply have no clue.

An investor in these products is basically buying the market basket, with much higher fees and the prospect of more volatility.

If one wants to hold the broader market, opt for QQQ for a tech bias or SPY to be broadly diversified.

If one wants to invest in EVs and related tech equities for real, dig through these ETFs’ holdings and select the promising nuggets that might be winners someday. Some may fail, but one winner should more than make up for those losses. That task is beyond our scope here, but we hope to return to it soon.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)