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BATT Energizes Returns In The Battery Metals & Materials Space

The date of: 2021-02-08
viewed: 2

source:Seeking Alpha

Summary

Amplify’s dedicated play on electric mobility and a developing commodity super cycle, positions investors well for superior risk adjusted returns.

The fund is premised on the growing importance of the race for renewable energy which is shaping global politics.

It showcases investments in global advanced battery material companies, which mine a select range of precious metals for the development of batteries.

We breakdown the ETF to see if it will energize future returns.

Brief Thesis

The Green Revolution is just beginning. Premised on ideals of holistically improving the environment and embracing sustainability as a long-term collective goal through widespread use of technology, alternative energy remains central to this broad topic.

Shunned openly by a large part of the corporate world only until recently, alternative energy is gradually becoming a driving force in the quest to reduce greenhouse gas emissions. The theme continues to garner widespread investor interest on the resounding success of firms such as Tesla Inc (TSLA) which have put sustainable energy at the heart of their product offering.

But just how sustainable is alternative energy? And what lasting environmental impacts intrinsically linked to increased mining of rare earths and precious metals are presently known? In many ways, global energy is at a crossroads where deep cutting changes in the energy mix will provide the backdrop to clear environmental improvements while possibly also bringing a distinct set of problems yet to really surface.

Long-term efficient recyclability of rare earths, operational practicalities related to running batteries, possible future safety concerns, and real environmental efficacy linked to mining are broad subjects which have yet to be fully discovered.

Which leads to a central question – will progressive changes in the energy mix eliminate one set of terminal problems with a wide range of new ones? Difficult to clearly answer that question now, given the little experience we have in resorting to battery technology on a mass scale.

So, while a litany of question marks pepper environmental policies and strategic initiatives the world over – one certainty is abundantly clear. Permutations in the energy mix are here to stay, have the merit of being embraced, and more widely studied.

With these changes has come evolution to the investing world too – the growing prominence of thematic investment plays – whether they are related to battery technology, artificial intelligence or even the internet of things. They too, are here to stay.

Fitting nicely into the family of thematic ETFs with a tilting towards renewable energy is Amplify ETF Trust – Advanced Battery Metals & Materials ETF (BATT). It offers investors, through a range of investments in mining-centric firms, long exposure to the renewable energy revolution which is sweeping the globe.

I maintain a bullish outlook for the sector and a neutral position on (BATT) given some of its underlying characteristics detailed below.

Overview

Amplify Advanced Battery Metals & Materials ETF (BATT) is a thematic ETF focused on alternative energy. The fund selectively identifies a range of underlying firms by certain criteria. Most prominently, a requirement for underlying companies to derive 50% of revenues from mining, exploration & production, development and/or processing of precious metals and rare earths is a key criterion for selection.

Explicitly, ventures involved in lithium, cobalt, manganese, nickel, and graphite industries are targeted by the exchange traded fund. The fund does take a liberal approach in the definition of battery metals & materials, even choosing in some instances, companies deriving 90% of revenues from production of electric vehicles. This is logical for ventures like Tesla Inc (TSLA) which aim to expand more concretely into this field. Less so for other organizations.

Index components are weighted by market capitalization with a 7% cap as maximum weight. Electric vehicles and component suppliers cannot make up more than 20% of the index.

Structure

A detailed overview of Amplify Advanced Battery Metals & Materials ETF (BATT) structure provides insights into drivers of the fund’s returns.

Surprisingly, Tesla Inc (TSLA) takes up a central place in the ETF’s make-up. This is noteworthy for investors looking for exposure to the space, particularly if they already hold an equity position in the Fremont electric vehicle stalwart.

Securities overlap can be a relevant issue – particularly given that the majority of Tesla Inc (TSLA) revenues, at least presently, are generated by the sales of electric vehicles. Notwithstanding, the electric vehicle giant has made a commitment to develop its own battery technology so, as time progresses, the manufacturer’s standing in the fund will progressively become more justified.

Another point of interest is the international profile to the holdings – we have listed companies from multiple countries, including China, Korea, Japan, and the UK. Asia Pacific makes up ~55% of the holdings, followed by America ~33% and Europe ~12%.Of that regional mix, China represents the lion’s share of underlying securities – with ~37% of companies being from the Land of the Red Dragon.

Consequently, this implies a degree of FX translation risk and costs linked to administration of ADRs which we would not usually see in US dedicated offerings. Country risk needs to be sizeably factored into any appraisal of the fund.



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