Battle Of The Battery Metal ETFs: BATT Vs. LIT (NYSEARCA:BATT) (2024)

There is a new competitor in the thematic ETF space, which seeks to provide exposure to the accelerating global demand for advanced battery technology. The Amplify Advanced Battery Metals and Materials ETF (NYSEARCA:BATT) launched on the NYSE 6/6/18.

BATT is an actively managed ETF that seeks to provide exposure to Lithium, Cobalt, Nickel, Manganese and Graphite used in advanced battery chemistries. Companies in BATT are principally engaged in the business of mining, exploration, production, development, processing or recycling of advanced battery metals and materials.

The Lithium-Ion Battery Revolution: The Electrification of Energy

So why should investors want exposure to the lithium-ion battery supply chain in the first place? The investment story is really a case study for Economics 101. With regard to battery metals, there is limited supply coupled with accelerating global demand.

What are the key factors driving demand for lithium-ion batteries?

Lithium-ion batteries are helping power a technology revolution. With five times the energy density of lead batteries, rechargeable lithium-ion batteries power mobile devices such as smartphones, tablets, laptops, robots, and drones. While technological advances and cost reduction have helped drive a lithium-ion battery boom for mobile devices over the last few years, the next leg of demand will come from electric vehicles and energy storage, powering the future of green technology.

The greatest uptick in demand is coming from the growing global demand for electric vehicles (EVs). Bloomberg New Energy Finance predicts that transport demand for lithium-ion batteries will soon overtake demand for consumer electronics, which includes smartphones.

Source: Bloomberg.com

What percentage of growth are we talking about? Estimates differ. According to Orbis Research, the global Lithium-ion battery market, which accounted for $29.86 billion in 2017, is expected to reach $139.36 billion by 2026, growing at an impressive compound annual growth rate (CAGR) of 18.7%. But Goldman Sachs predicts battery demand will grow at a CAGR of 32% through 2025, driven by increased electric vehicle battery production.

At the end of 2017, global EV penetration of the automobile market stood at only 1%. Keep in mind, an EV battery is equivalent to about 4,500 smartphones! That translates into a lot of room for growth and the associated acceleration in demand.

What's Driving EV Growth?

• Environmental Regulation

Government targets for fuel efficiency and emissions will further incentivize automakers to increase electric vehicle production. Increasingly, more countries are committing to banning, or at least limiting, the sale of internal combustion engine (ICE) vehicles over the next decades as part of efforts to reduce air pollution.

• China

China, now the world's largest electric car market, has seen the highest growth rate for EV sales. While EVs currently represent only 3.3% of China's auto market, the country's pollution problem favors more electrification. It has been leading the way with progressive subsidies, penetration targets, investment and number of EV models, with more than 100 options available. The government has strongly encouraged consumers to make buying an electric car the only way to ensure getting a license plate in crowded cities. 15 Over 600,000 EV units were sold in China in 2017, up 71% from the previous year.

China is eyeing EV sales quotas, which could mean that by 2025, a fifth of new vehicles will be electric or plug-in.

China is also a key player on the lithium-ion battery supply side, with roughly 55% of global lithium-ion battery production compared with 10% in the United States. China's lithium-ion battery supply is expected to grow to 65% by 2021.

• Falling Lithium-Ion Battery Prices

Another factor supporting greater adoption of EVs is that battery prices continue to get cheaper.

The average price of a lithium-ion battery pack is down to $209/kilowatt-hour and prices are set to fall even further to below $100/kWh by 2025. To allow for mass adoption, EVs and hybrid vehicles need to be priced comparably to gas-powered cars without subsidies. According to a survey by Bloomberg New Energy Finance, lithium-ion battery prices have dropped more than 70% since 2010. Tesla battery prices that hovered at $400/kWh a few years ago are now near $150/kWh.

• Increased EV Commitments from Automakers

Automakers worldwide have committed $90 billion to EVs and battery technology, which includes $19 billion in the United States, $21 billion in China and $52 billion in Germany. Volvo, the Chinese-owned Swedish brand, announced it would stop making traditional gas-powered cars in 2019. The largest single investment is coming from Volkswagen AG (VLKAY), which plans to spend $40 billion by 2030 to build electrified versions of its 300-plus global models.

• Growing Consumer Acceptance

Some of the biggest impediments to mass-market penetration are the effects of climate on battery performance and the challenges involved with the charging infrastructure. EV makers have implemented a number of solutions to address temperature issues, which include changing battery design, improving battery management systems, climate grading systems, and cabin preconditioning. In addition, faster charging times and greater charging capacity are expected to come online, helping reduce "range anxiety" and further promoting mass-market adoption.

Investment Case

Growing global demand for lithium-ion batteries to power consumer devices, electric vehicles, and grid storage, coupled with constrained supply and capacity has created conditions that continue to drive up the prices of battery metal and mining stocks. It has also spurred investment activity in the space.

This growth trend creates significant opportunities for investment in the underlying elements contained within lithium-ion batteries such as:

• Lithium
• Cobalt
• Nickel
• Graphite
• Manganese

Source: EQM Indexes

Given the supply constrained capacity to meet the growing demand for lithium-ion batteries, prices of the underlying battery metal, and the companies that mine them, should continue to rise. Investors in companies developing and producing battery metals are likely to be rewarded.

Investment Vehicles

Investors may gain exposure to battery metal and mining companies through direct investment, but many of the key players in the space are domiciled outside the U.S., primarily in Canada, Australia, South America, and China. Many of these companies only trade in local share versions that are difficult for U.S. investors to access.

Exchange traded funds (ETFs) offer a great vehicle to give investors diversified exposure to this growing global trend.

So let's compare the two purest-play options: the new Amplify Advanced Battery Metals and Materials ETF and the Global X Lithium & Battery Tech ETF (NYSEARCA:LIT).

Up until recently, LIT was the only ETF option targeting the theme of lithium-ion battery growth. LIT has had much success over the last few years attracting investor assets. The ETF has just shy of $1 billion in assets under management, currently at $997.7 million.

The new player, BATT, just launched on June 6, 2018, with $2 million.

So what are the biggest differences between these two ETF options?

Here is a comparison table for review:

* Pursuant to a contractual agreement, the Fund's investment adviser has agreed to waive management fees of 0.20% of average daily net assets until May 23, 2019.

LIT Vs. BATT: Here Are 5 Key Takeaways

1. LIT Passively Managed vs. BATT Actively Managed

LIT is passively managed, tracking the Solactive Global Lithium Index, while BATT is actively managed, but references the holdings of the EQM Battery Metals and Mining Index. LIT's holdings are refreshed on a semi-annual basis, while BATT's holdings will change on an active basis. Their expense ratios are currently about the same, however, that is due to BATT's initial fee waiver of 0.20%.

2. LIT Market Cap-Weighted vs. BATT Modified Equal Weight (Smart Beta)

LIT is weighted by market capitalization, while BATT is equal weighted within each metal category: Lithium, Cobalt, Nickel, and Other (Manganese, Graphite, Recyclers). As a result, LIT is more concentrated in its top 10 names, comprising 77% of its weight, versus BATT which is more diversified at only 34%.

76.5%

33.6%

3. LIT and BATT Offer Different Market Capitalization Exposures

LIT's cap weighting skews its composition to be larger in market capitalization and with some big weights in the largest companies. While BATT has a greater weight in small cap names. LIT is 66% large cap, while BATT is only 33% large cap as of 6/6/18.

4. LIT and BATT Have Little Overlap in Names and Offer Different Market Exposures

The holdings overlap between the 2 ETFs is quite low at only 8 names. 20% of the holdings in BATT are also in LIT, while 31% of the holdings in LIT are in BATT.

LIT is primarily focused on lithium and battery technology, while BATT is focused on battery metals and recycling.

The biggest difference in holdings composition is that LIT (as its name suggests) primarily has exposure to lithium stocks and battery technology. BATT, by contrast, is a pure-play on materials and the underlying battery metals, with exposure to companies in Lithium Cobalt, Nickel, Manganese, Graphite, and Metal Recycling.

Investors wanting more pure-play exposure to the supply chain for batteries should invest in BATT.

5. LIT and BATT Offer Very Different Country/Regional Exposure

LIT, due to its market cap weighting structure, is 45% U.S., while BATT is only 8% U.S. LIT is 70% developed markets, while BATT is 81%, thanks to heavy weights in Canada and Australia.

Holdings data for LIT and BATT as of 6/6/18

Conclusion

Amplify's Advanced Battery Metals & Materials ETF offers explicit exposure to the underlying metals utilized in lithium-ion batteries, not just lithium. BATT gives investor exposure to the other metals used in today's battery chemistries such as: cobalt, nickel, graphite, and manganese. This offers a nice diversification benefit relative to Global X's Lithium & Battery Tech ETF.

Investors should decide how best to play the global growth trend related to accelerating demand for battery technology associated with electronic devices, electric vehicles, and storage solutions.

Rising demand for battery metals favors BATT given it is supply-based. LIT's end-users such as battery manufactures, energy storage, and EV makers should benefit from growing global demand for battery technology as well, but will be hurt by the higher input prices associated with limited supply.

In our opinion, investors in BATT, which offers explicit exposure to companies developing and producing battery metals on the supply-side, are likely to be rewarded over the long-term. However, given that these companies are smaller in cap and more exposed to emerging markets that trade overnight, investors should recognize that BATT is likely to be volatile along the way.

Disclosure

EQM Indexes is the creator of the EQM Battery Metals and Mining Index. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. EQM Indexes does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. EQM Indexes makes no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. EQM Indexes is not an investment advisor, and makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth on this website. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by EQM Indexes to buy, sell, or hold such security, nor is it considered to be investment advice.

Jane Edmondson