The electric vehicle (EV) market is gaining strength across the globe, with more EVs on the road than ever before. As more and more investors want in on the party, it can be difficult to determine which stocks will soar like we've seen with Tesla. The possibilities are many, including EV manufacturers, battery makers, lithium producers, and companies that focus on infrastructure.
One way to pick the right stock, while also mitigating the risk of picking nothing but the wrong stocks, is to invest in an exchange-traded fund that focuses on the EV market as a whole. Two of the leading ETFs -- by performance -- that can satisfy the cautious investor are the Global X Autonomous & Electric Vehicles ETF (DRIV -1.41%), and KraneShares Electric Vehicles and Future Mobility Index ETF (KARS -2.19%).
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Global X Autonomous & Electric Vehicle ETF
The holdings and performance of the Global X Autonomous & EV ETF track closely to the price and yield performance of the Solactive Autonomous & Electric Vehicles Index, which targets companies that produce EVs, and related components, technology, and network-connected services. Among the top holdings are a few behemoths in the way of innovation, technology, and manufacturing, such as Apple, Nvidia, Tesla, Ford, and Toyota, and lithium miners Albemarle and Pilbara Minerals, which are needed for electric batteries.
There are positives and negatives that come along with the Global X ETF. On a positive note, the asset weight -- how much of each stock is owned as a percent of the total -- is fairly even and spread across 81 different holdings, the largest being Tesla at 4.83%.
One downside presented from this ETF is that within the top holdings, there can be overlap with other stocks in an investor's portfolio. Apple, Nvidia, Tesla, Microsoft, and Alphabet are among the top six, leaving a heavy reliance on big-name companies and a teeter-totter leaning heavily toward technology. A second downside, which is more based on lack of data, is that the ETF is only a little more than three years old, having started in April 2018. And lastly, the ETF comes with a steep expense fee of 0.68% which finds itself on the upper end of the average -- .05% to 1.00% -- fee for an ETF.
But back to the positives. As the overall market finds its way through a recent volatile period during which these tech stocks have taken some hits due to inflation and pandemic-related concerns, a rebound should prove out nicely over the next three to five years. This is based on the performance history of the ETF, and the projections for the EV market going forward. Over the past three years, the Global X Autonomous & EV ETF has had a solid 25% annualized return, helped along by a one-year return of 63%. By comparison, the three-year return tops that of the S&P 500's total three-year return of 65.5%.
KraneShares Electric Vehicles and Future Mobility Index ETF
Similar to the Global X ETF, this KraneShares ETF looks for results that correspond to the price and performance of an index as well. In this case, it is focused on the Bloomberg Electric Vehicles Index, which targets companies involved in the production of the vehicles, their components, and the future of mobility.
The top holdings differ from the Global X ETF in that only two of the top 10 holdings are similiar -- Tesla and Ford. It also carries a heavier asset weight of 47% in its top 10, compared to 31% for Global X. This leads to a heavier reliance on its key holdings and can provide a bit more risk to investors. On the flip side, it could also provide higher reward if its heavier-weighted holdings perform well.
A group of holdings investors will hope does well is that of EV battery stocks, including BYD, LG Chem, and Panasonic, in addition to China's second biggest stock -- by market value ($249 billion) -- Contemporary Amperex Technology. CATL is the leading holding by asset weight in the ETF, at 5.5%, but more importantly, it's an EV manufacturer responsible for providing battery cells to a customer list that includes Tesla and Nio, which are both among the top holdings in the ETF as well.
So, as the need for batteries from Tesla or Nio increases or declines, it could have a stronger effect on the reward or risk to investors of this ETF.That effect may be more on the reward side if future market growth projections come to fruition. According to research firm Research And Markets, the EV battery market is expected to grow at a compound annual growth rate of 26%, to $175 billion, by 2028.
As if that growth number isn't enough to get excited about, Growth Market Reports expects the global EV market, valued at $273 billion in 2020, to grow at a CAGR of 21.6% through 2028, to a ridiculous -- in a good way -- $803 billion. At that rate, it's conceivable that the KraneShares ETF can sustain its three-year annualized return rate of 22%.
For the investor with a long-term investment strategy, these two ETFs are just getting the wheels spinning toward what could become the kind of gains that produce a lifetime of energy for any portfolio.