The Fuse

New ETF Seeks to Take Advantage of Growing Demand for Battery Metals

by Matt Piotrowski | June 29, 2018

With demand for key battery metals taking off due to rising interest in electric vehicles (EVs), mobile devices, and energy storage, investors are looking for opportunities to gain exposure to companies up and down the supply chain. To fill this need, Amplify ETFs recently launched a fund to provide investors the opportunity to put capital in a variety of firms operating in the battery metal space—which includes lithium, cobalt, manganese, graphite, and nickel.

Amplify ETFs, which began in 2016 and now has $850 million in assets under management, has included disruptive technologies in its assets to provide investors with opportunities in markets traditional funds have yet to tap. For instance, another ETF Amplify recently launched deals with data-sharing companies that are involved in the growing blockchain space.

The Advanced Battery Metals and Materials ETF, which now has $9 million under management, is an active fund rather than one that is index-based. This set-up gives portfolio managers the opportunity to shift allocations on a daily basis as a result of recent news and trends, allowing them to better handle risk. Companies included in the ETF are engaged in the mining, exploration, production, development, processing or recycling of battery materials.

“It’s connected to global growth, it is used as an inflation hedge, and it is a diversification tool.”

“Investors are interested in this product for three main reasons,” Christian Magoon, the CEO and Founder of Amplify ETFs, told The Fuse in an interview. “It’s connected to global growth, it is used as an inflation hedge, and it is a diversification tool.”

He added: “Investors want exposure to all battery metals, particularly with electric vehicles spurring demand.”

There are 41 companies in the ETF, with Katanga Mining—based in Zurich with operations in the Democratic Republic of Congo—with the largest holding, at 4.6 percent. Others include Charlotte-based chemical manufacturer Albemarle Corp., Chilean Lithium producer Sociedad Quimica, and international commodity trader Glencore. Most are relatively obscure companies that will likely generate more headlines in coming years given their importance on the supply chain.

Growing demand for EVs has been reflected in sales numbers over the past several years. The International Energy Agency said that more than one million EVs were sold in 2017, a record, with more than half occurring in China. There are now more than 3 million EVs globally, an increase of more than 50 percent from 2016. The IEA sees 125 million EVs on the road by 2030, with the possibility of the number reaching 220 million if governments adopt more ambitious environmental targets. Against this backdrop, demand for raw materials used in lithium-ion battery production or EVs and companies that produce these commodities are expected to grow exponentially over the next couple of decades, particularly as costs fall.

Although the outlook appears rosy for battery metals, there are numerous risks that could undermine returns and perhaps make this sector an ambiguous bet. “There’s a lot of exposure to firms outside the U.S. and in emerging markets,” Magoon told The Fuse. “There are currency risks, and production takes place in countries where there are above-ground geopolitical risks.”

Analysts and industry argue that these markets, necessary for EVs and personal devices, are now only in its infancy, with significant potential to the upside.

At the same time, two-thirds of the companies in the ETF are small- to mid-cap. This means that their stock prices are likely to see increased volatility, and less risk averse investors may shy away. There is also “over-concentration” risk, meaning that the ETF is highly exposed to one sector. Should industry fundamentals shift and become less bullish, returns for all companies may weaken at once. Lastly, negative “headline” risk is also a major factor that could challenge the strong outlook. For instance, news about companies participating in unethical or unlawful acts (child labor used for cobalt production in the Congo is one example) is another factors investors must weigh.

Regardless, Amplify ETFs are confident that now is the right time to launch this product with a growing investor appetite and the beginning of the electrification of the car fleet. The markets for lithium and other metals are already growing amid increased penetration of EVs. Analysts and industry argue that these markets, necessary for EVs and personal devices, are now only in its infancy, with significant potential to the upside.

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