Charge Up Your Portfolio With Enticing Electric Vehicle Exposure

Electric vehicle (EV) manufacturers played a significant role in the standout performance of alternative energy equities last year. With a strong 2020 in the rearview mirror, can these companies continue their upward momentum in 2021? A new Alerian note discusses recent delivery reports from electric vehicle manufacturers and how the long-term outlook for electric vehicle adoption could help drive further outperformance for alternative energy.

Even with total US auto sales declining in 2020, several electric vehicle companies reported record high deliveries last year. Key highlights include:

  • Tesla (TSLA) recently announced that full-year 2020 deliveries totaled 499,550, effectively matching their guidance of 500,000 and representing a nearly 36% year-over-year increase.
  • Chinese EV manufacturer Nio (NIO) set new all-time highs for vehicle deliveries for December and 4Q20, with total annual deliveries of 43,728 representing a 112.6% year-over-year increase.
  • More traditional automakers, including General Motors, continue to push into the EV market, underscoring the long-term viability of the space.

Alerian Research Analyst Bryce Bingham told ETF Trends that the significant price appreciation of electric vehicle equities was the most important development of 2020 for investors.

“In a year characterized by market volatility, the standout performance of electric vehicle manufacturers and broader alternative energy is worth noting,” Bingham said. “The significant growth in electric vehicles’ sales market share that is expected to occur over the two decades is the most exciting part of the outlook for the sector, in my opinion. While electric vehicles already command headlines, they still only represent a small portion of the global auto fleet and, by Bloomberg’s estimates, less than 3% of total auto sales in 2020. However, with the expected improvements in battery technology, favorable economics for buyers, and more investments in EVs from traditional automakers, EV market share is projected to see notable growth through 2040.”

Asked his thoughts on the Biden administration and how this may impact the EV space, Bingham said it could provide a catalyst.

“While growth in electric vehicle adoption isn’t dependent on supportive government policy, as we’ve seen over the last four years, the Biden Administration could provide a catalyst for the electric vehicle space,” he said. “President Biden has proposed restoring tax credits for electric vehicle purchases as well as working with state and local governments to install more than half a million public charging stations over the next decade. Both of these measures will help entice drivers into switching over to an electric vehicle.”

The long-term outlook for EVs shows significant growth for the sector over the next two decades driven by supportive government policy and acceleration of investment in the space, among other things.

  • BloombergNEF’s Electric Vehicle Outlook 2020 helps frame the growth potential for the EV market over the next two decades. This report estimates that passenger EV sales will increase by 18.9% annually from 2020 through 2040, as seen in the chart below.
  • The sales market share of EVs is expected to grow from less than 3% in 2020 to 58% by 2040, driven particularly by China and Europe.
  • Rapid adoption of EVs should be propelled by improving battery technology, favorable economics for buyers, and an acceleration in investment in EVs by automakers. Innovations in battery technology by EV companies also have positive implications for the rest of the alternative energy space, as discussed in Alerian’s November 2020 white paper (read more).

Bingham said it’s worth noting that the impact of more electric vehicles on the road stretches far beyond this sector alone.

“An increase in electric vehicles will require a significant amount of additional electricity demand, which will increasingly be met by renewable energy sources,” he said. “Improvements in battery technology by electric vehicle manufacturers will not only benefit the driving range of their vehicles but could also improve clean energy storage. In short, the benefits of high electric vehicle adoption extends to the rest of the alternative energy space.”

Government incentives will also play a major role in this expected EV growth.

  • Several countries, including the UK, France, and Norway, have established bans on the sale of internal combustion vehicles in the coming decades, with the UK recently moving up its ban on new diesel/petrol cars and vans to 2030 compared to its original target of 2040.
  • The EU COVID-19 stimulus package contains several measures designed to help countries increase EV adoption, including the installation of two million electric and hydrogen charging stations by 2025 and €20 billion to support clean public transit.
  • In the US, California will phase out the sale of gas-powered vehicles by 2035 and will require all medium- and heavy-duty trucks to be zero-emission by 2045, in line with the state’s 2045 net-zero target.
  • President-elect Biden has proposed working with cities and states to install more than half a million public charging stations over the next decade and restoring tax credits for EV purchases.

Given the long-term importance of EVs to the energy transition, EV manufacturers are a critical component of an alternative energy allocation.

  • The Ardour Global Alternative Energy Indexes were the first indexes to provide globally-inclusive, alternative energy exposure. AGIXL represents an investable subset of the broader alternative energy universe and has constituents across several clean energy subsectors, including wind and solar energy players, semiconductor manufacturers, and, importantly, electric vehicle manufacturers.
  • As of January 13, AGIXL’s two largest constituents, which accounted for 19.0% of the index by weighting, were NIO and TSLA.
  • When including BYD, another smaller EV manufacturer, EVs account for nearly one-fourth of AGIXL by weighting. This leaves the index well positioned to capture upside from the trends in EVs as well as the broader growth in clean energy.

Investors bullish in the clean energy space can look to the VanEck Vectors® Low Carbon Energy ETF (SMOG) that seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Ardour Global IndexSM Extra Liquid (AGIXLT). The index is intended to track the overall performance of low carbon energy companies which are those companies primarily engaged in alternative energy which includes power derived principally from bio-fuels (such as ethanol), wind, solar, hydro and geothermal sources and also includes the various technologies that support the production, use and storage of these sources.

“As Joe Biden is being sworn in as president, many on Wall Street are looking for sectors that are going to get attention from the new administration,” said ETF Trends CEO Tom Lydon. “The EV space is one of them.”

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