Investing in the Electric Vehicle Ecosystem With KraneShares

Environmentally focused and ESG funds saw an influx of money in 2021, with the electric vehicle industry growing in leaps and bounds. Anthony Sassine, CFA and senior investment strategist for KraneShares joined Lara Crigger, managing editor of ETF Trends and ETF Database, in a webcast to discuss the potentials within the electric vehicle ecosystem beyond the biggest names, like Tesla.

The number of electric cars sold jumped from 3.1 million in 2020 to 6.3 million in 2021 and beat analysts’ expectations by 34%. The transition to electric vehicles is being driven by the climate change crisis, Sassine explains, and the energy transmission and carbon emission reduction transition is estimated to cost $131 trillion within the next 30 years.

“We all get excited about a multi-billion dollar industry; now we’re talking about something in the hundreds of trillions [of dollars]. It’s huge.” Sassine says. “30% of that is going to be going to electrification, another 30% of that is going to be going to energy efficiency; that means batteries, which is also very related, so big investment opportunities for the next 20-30 years.”

Tesla had the top EV sales globally (936,000 vehicles) and makes up about half of the market in the U.S. In China, BYD sold roughly 600,000 EVs. Within the battery market, which is a huge driver for EV production and increased efficiency driving down the costs of cars, Contemporary Amperex Technologies, a company based out of China, was the biggest producer globally for batteries.

Because of lithium price increases in 2021, battery prices are expected to increase somewhat this year, but battery makers are pushing to increase their battery capacities, which ultimately will help drive prices for EVs down. That, coupled with an increasing energy structure that is seeing support from governments as well as companies investing in growing the charging infrastructure will make EVs more marketable and more viable for those that have concerns regarding energy sources and travel.

“Governments want you to buy electric vehicle cars, whether in China, in Europe, in the U.S., everywhere in the world because that’s the answer to a lot of problems that they think it’s causing humanity in many ways,” Sassine explains. China continues to provide a highly supportive regulatory environment for green projects, as does Europe.

In 2022, KraneShares estimates there will be between 10.4-10.5 million EVs sold worldwide, battery capacity will increase, EV shares of all vehicles sold globally will top 10% for the first time, government regulations will move from direct subsidies to investments in research and infrastructure, and the semiconductor shortage will improve in the second half of the year.

Investing in EVs and the Future Mobility Ecosystem

The EV ecosystem encompasses a broad range of industries, from EV and battery manufacturers to raw materials necessary for components, as well as a charging infrastructure and AI and 5G uses in autonomous driving and vehicle connectivity.

Sassine discusses the KraneShares Electric Vehicles & Future Mobility Index ETF (KARS) and the research that KraneShares put into deciding how to build a portfolio for the fund that would represent the entirety of the industry. Its answer was to select the Bloomberg Electric Vehicles Index, which the company believes is the best representation of the EV industry and is built on research from Bloomberg Intelligence and BloombergNEF. It is an index that is best representative of the largest EV markets by country, with the top being China and the U.S., followed by Germany and the EU. No single issuer is weighted at more than 25% of the index, and it is representative of the entire EV spectrum.

When looking to invest thematically, it’s important that the thematic allocation doesn’t have much overlap with core allocations, otherwise a portfolio is highly exposed to correlated risks.

Image source: KraneShares webcast

“When you look at KARS, only 3.1% of KARS overlaps with the S&P, and most of that is Tesla and Nio,” says Sassine. It’s the “same thing with MSCI ACWI, only 2.7%. Again, if you take out Tesla and Nio, the rest of the ecosystem is very underrepresented, so that’s a great opportunity for you to have an add-on to your global equity portion.”

KARS carries an expense ratio of 0.70%.

For more news, information, and strategy, visit the China Insights Channel.

Financial advisors who are interested in learning more about the electric vehicle ecosystem can find the webcast replay here.