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For ETF investors, there are multiple ways to play the vehicle electrification trend, particularly if one doesn’t mind holding U.S. funds.PETER DASILVA/Reuters

The once sleepy automotive industry – characterized by the “Big Three” U.S. automakers pitted against a few Asian and European rivals all producing internal combustion engines – seems a distant memory.

In its place, existing manufacturers and upstarts led by Tesla Inc. are racing to electrify the world’s vehicle fleets, generating the most excitement the industry has seen in decades.

For ETF investors, there are multiple ways to play the vehicle electrification trend, particularly if one doesn’t mind holding U.S. funds.

These funds have enjoyed double-digit returns thanks to a strong push for the electrification of the U.S. vehicle fleet and the building of ‘green’ infrastructure necessary to make it happen such as a network of fast-charging stations by the Biden administration.

“There is a widespread and accepted consensus on the Street that over the next decade or two there will be a crossing point between the sales of traditional internal combustion vehicles and electric vehicles,” says Daniel Straus, director of ETFs and financial products research with National Bank of Canada Financial Markets in Toronto.

“That moment may come in five years, 10 years or 20, but it is seemingly inevitable.”

He identified a half dozen ETFs that are traded in the U.S. with exposure to the vehicle electrification theme.

The largest is the Global X Autonomous & Electric Vehicles ETF (DRIV-Q), which has produced a total year-to-date return of 27 per cent with a 0.68 per cent management expense ratio (MER) and total assets of US$1.3-billion. (All data from Morningstar as of Dec. 9 close).

The largest holding in the fund is Tesla at nearly 5 per cent, followed by chipmaker Nvidia Corp., Microsoft Corp., Alphabet Inc. and Apple Inc.

A “very similar product” is the iShares Self-Driving EV and Tech ETF (IDRV-Q) with a year-to-date return of 27 per cent, a 0.47 per cent management fee and US$595-million in total assets.

Mr. Strauss also pointed to KraneShares Electric Vehicles and Future Mobility Index ETF (KARS-N) with a year-to-date return of 28 per cent, 0.7 per cent MER and total assets of US$355-million and the SPDR S&R Kensho Smart Mobility ETF (HAIL-N) with a return of 6 per cent for the year, an MER of 0.45 per cent and total assets of US$182-million.

For investors looking for exposure to the more traditional auto industry, there is the First Trust Nasdaq Global Auto Index Fund (CARZ-Q), whose top five holdings include Tesla, General Motors Co., Daimler AG, Toyota Motor Corp. and Honda Motor Co. The fund has produced a return this year of 21 per cent, with a 0.7 per cent MER and has total assets of US$78.9-million.

The National Bank analyst warns that, while the auto sector and the electric vehicle sector in particular have done well as the world emerges from the pandemic, investing in the sector is not for the faint of heart.

“Whenever there is massive change in the industry, there is going to be volatility,” he explains. “There will be enormous opportunity, but there is also the possibility of kind of getting caught in a bubble and then suffering when it pops. There may be several waves of those as the industry transitions from one mode of doing business to another.”

He notes that it is not just the auto industry that’s set to change how its vehicles are powered, but a society-wide transformation that has to happen in areas such as energy and infrastructure as well as cultural shifts that may mean more ride-sharing and an overall shrinking of vehicle fleets in developed nations.

For Canadian investors who do not want to utilize U.S. ETFs, options are more limited. The only pure-play automotive fund is the Evolve Automotive Innovation Index Fund (CARS-T), which invests in companies involved in developing electric drivetrains, autonomous driving or network connected services for autos.

The four-year-old fund was one of the first to identify the ongoing industry revolution led by electric vehicle maker Tesla and was one of the first successful ETFs from Toronto-based Evolve.

CARS has produced a price return this year of 8 per cent, with an MER of 0.63 per cent and total assets of $106-million.

Evolve’s chief investment officer Elliot Johnson came up with the idea for CARS after passing a row of Teslas in his downtown office parking garage that was granted prime parking space and free recharging ports.

“We thought, every car company is going to need what these guys are doing,” Mr. Johnson says. “That means they are going to have to invest in battery technology, in the connected car, connecting to infrastructure, connecting back to cloud services for mapping and safety, driver assist technology and autonomous driving technologies.

CARS top holdings include the likes of U.S. EV makers Lucid Group Inc., Canoo Inc. and Fisker Inc. as well as interface hardware and software company Synaptics Inc. and chipmaker Nvidia.

Mr. Johnson has company research that suggests there is pent-up demand for electric vehicles among consumers. In effect, some car buyers have been holding on to their current vehicles during the pandemic waiting either for the right vehicle to be available or for financial incentives to be put in place by various governments to buy electric.

“That may cause the transition to kind of oddly happen all of a sudden,” he says. “The customers are there and the demand is there and it is not slowing down. They are selling every car they can make these days.”

U.S. government financial support, in the form of infrastructure bills winding through Washington, will also provide a tailwind for electric vehicle manufacturers and the supply chains that support them.

The need for federal support does add a bit of political risk to the EV-heavy ETFs such as DRIV and IDRV more so than the auto industry-wide CARZ fund, says Todd Rosenbluth, head of ETF and mutual fund research with CFRA Research in New York.

“If the government does not provide as much spending support to incentivize Americans, then we could see weaker demand and weaker demand could negatively impact the outlook. There is political risk tied to this.”

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 23/04/24 3:08pm EDT.

SymbolName% changeLast
GX Autonomous & Electric Vehicles ETF
Ishares Self-Driving Ev and Tech ETF
KS Electric Vehicles and Future Mobility ETF
SPDR S&P Kenso Smart Mobility ETF
Nasdaq Global Auto Index Fund
Evolve Automobile Innovation Idx Hgd ETF

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