Electrification Metals ETFs: Tactical Bet on a Secular Transformation
Sean Daly
Updated 5 min read
As the global economy decarbonizes, the massive demand for renewable energy, electrification and battery storage will require an estimated $130 trillion in new investment over the next three decades. The scale is staggering.
According to the Energy Information Administration, there will be 672 million electric vehicles on the road by 2050, rising from 0.7% today to 31% of the world’s total fleet of light vehicles.
Electrification metals exchange-traded funds lean into this story of historical change—one that is now actively supported by every government of the developed world—while remaining purely agnostic on which manufacturers will achieve dominance. We’ve seen three launching in this space over the past year and there are several factors to consider for investors interested in these names.
Unlike the more pervasive battery tech ETFs, they are not focused on the equities of car, tech or mining companies. They avoid the Tesla versus Lucid Motors brand contests and focus instead on those underlying metals that are at the heart of energy revolution.
Rising Demand
An EV uses six times more minerals than a gas-powered car—lots of copper for electrification and lots of lithium, nickel, cobalt and aluminum for its batteries. According to BloombergNEF estimates, the demand for these elements is expected to increase 500% by 2050, while the price paid for lithium and copper is expected to reach seven times and 5.5 times today’s market value, respectively.
“The data shows a looming mismatch between the world’s strengthened climate ambitions and the availability of critical minerals that are essential to realizing those ambitions,” according to Fatih Birol, an executive director of the International Energy Agency. Over the next five years, the supply constraints will be tangible.
The whole thing sounds like a “can’t lose” investment thesis, and we can expect to see many launches in this nascent sector, particularly with its appealing long-term prospects.
But retail investors might prefer the nimbleness of an actively managed fund when hunting in this space. After all, this is the commodity sector, one where very high volatility, near-term recession fears, and the ever-evolving revisions within battery design will inevitably play out within this broader megatrend.
Electrification Metals at Work
Before delving into the ETFs themselves, let’s explore which resources are in high demand and how they operate at the center of present-day EV battery chemistry.
EV batteries are charged and discharged by a flow of lithium ions between a graphite-containing anode and a typical “nickel-cobalt-manganese” cathode. These cathodes need nickel to deliver high energy—allowing the vehicle to travel further—and use cobalt to extend battery life and ensure the cathodes themselves don’t catch fire. The majority of U.S. and European EV batteries have a cathode containing 10-20% cobalt.
While Tesla deploys a “nickel-cobalt-aluminum” cathode, the dominant chemistry in the U.S. auto sector is NCM.
Its original ratio of 1-1-1 has changed. Recent designs have included more nickel to boost energy density and push out the driving range, shifting the element ratios to 5-3-2, 6-2-2 or even most recently, 8-1-1. Keep the shifting nature of these elements in mind as we look at the individual ETFs and their holdings.
Launched last April, EVMT was first to market. The fund is presently invested in futures of five commodities upstream from the EV process: nickel (34.29%), copper (27.18%), aluminum (17.39%), cobalt (15.25%) and iron ore (5.64%), with lithium decidedly not in the mix as of March 30.
EVMT had the field to itself until October, when Krane Funds Advisors launched KMET. This passive fund follows the Bloomberg Electrification Metals Index, which tracks the return of a basket of metals key to the energy transition via commodity futures contracts.
The index itself was initiated on Sept. 7, a testament to the novelty of this investment space. It sets its target weights each January, and it rebalances on the fourth business day of each quarter, taking each commodity back to its target weight.
Lastly, CHRG launched on Dec. 28, 2022, and is co-managed by EMG Advisors and Vident Investment Advisory.
Ostensibly a global fund looking at both the EV battery and solar markets, with the capacity to invest “directly and through derivatives in stocks of companies operating across materials, metals and mining,” its holdings are heavily weighted to copper (75.72%), lithium (11%) and nickel (10%), with only a 1.39% weighting in cobalt.
Again, this is an actively managed fund, so its weightings are at the discretion of the managers.
Though the Bloomberg index is a good example of how this new theme is becoming institutionalized, nimble active management might be the right move in the near term due to the wide gyrations of several of these commodities.
While retail investors might be aware of lithium’s recent drop—down 33% year to date due to oversupply amid slower China EV purchases—they might not be aware of cobalt’s recent plummet or its difficult provenance.
Cobalt prices are down 57% year over year after peaking at $81,150 per ton last April. Experts see prices continuing to be pressured near term as a massive amount of cobalt hydroxide could be coming onto market as a months-long dispute may finally end between a Chinese operator and the Democratic Republic of the Congo. This dispute has kept the company from exporting its ever-growing mined inventory.
