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Nov 03, 2023

BATT: EV Battery Technology ETF Contends With Instability In China (NYSEARCA:BATT)

piranka I rate the Amplify Lithium & Battery Technology ETF (NYSEARCA:BATT) a

piranka

I rate the Amplify Lithium & Battery Technology ETF (NYSEARCA:BATT) a Hold as of right now. BATT stands out among funds focusing on the electric vehicle sector due to its distinct investment strategy, with an emphasis on Tesla as well as a broad global focus (especially in China). While the fund is positioned especially well to take advantage of the growing EV industry in China, its past performance says otherwise. Since its inception, the fund has significantly underperformed both the S&P 500 as well as several of its peers. However, the fund does boast an attractive dividend yield that compensates for this downside.

Moreover, China serves as a double-edged sword for BATT. On one hand, the nation is experiencing a burgeoning EV market that is set to expand into US markets. On the other hand, the country's economy is experiencing a slowdown with regulatory tightening on private markets. This is primarily why until these conditions improve, I am holding off on rating BATT a Buy.

Launched and managed by Amplify Investments LLC in 2018, BATT invests in stocks of companies that develop and produce advanced battery materials and technology around the world. These can include, but are not limited to, battery storage solutions, battery metal and materials, and electric vehicles. The fund invests in growth and value stocks and aims to track and replicate the performance of the EQM Lithium & Battery Technology Index. BATT employs a market-cap weighted approach in allocating its portfolio stocks, where individual stocks can achieve a maximum weight of 8%. The fund invests in a myriad of countries globally but focuses more on countries within developed markets.

BATT invests in several industries that relate to the production and development of lithium battery technologies. The most prominent sectors include electric vehicles, battery technology, energy storage, lithium, and other battery components. While BATT aims to provide global exposure within its portfolio, it primarily focuses on investing in Asian countries, such as Mainland China, Hong Kong, Taiwan, South Korea, and Japan. Moreover, the fund's portfolio is very concentrated in the top four holdings, with no stock in the rest of the portfolio contributing to more than 3% individually. A comprehensive distribution can be seen in the pie chart below:

etf.com

etf.com

BATT's key strength lies in its high dividend yield, though it only pays that out once a year. At nearly 4%, BATT's yield is significantly higher than that of its peer competitors, with the majority of its competitors between 1% and 2%. The fund's high dividend yield relative to its peers might be due to its investment in more mature and established companies within the battery technology and electric vehicle industries, having reached a stage where they generate large and stable cash flows.

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The fund has also consistently demonstrated strong and steady dividend growth. Despite the sharp drop in dividend yield across similar funds right before 2023, BATT managed to stabilize itself swiftly after the initial decline. Interestingly, the fund's yield at its rebound exceeded that of its pre-drop level.

In contrast, many of BATT's competitors struggled to return itself to their original yield levels after the drop, rebounding to a level lower than prior to its initial drop. This demonstrates BATT's superior recovery and its ability to continue growing and produce income despite market fluctuations.

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Despite BATT's global focus, the fund invests a large amount, over 30% of its portfolio, in China. This is potentially beneficial considering the profitable Chinese electric vehicle market, where EV sales have been booming, and are expected to expand to global markets, especially the United States. Chinese EV companies are competing very well against American competitors by producing better quality and cheaper electric vehicles. While the United States experienced a record high of 800,000 EV sales, China had over 5 million. China's EV sales have doubled in 2021 and 2022, and the space is still projected to grow at around 30% in 2023.

Mordor Intelligence

BATT has significantly underperformed the S&P 500 since its inception. The fund's Total Return recovered following the drop during the pandemic, but it was relatively unaffected by both the recession in 2022 and the recovery in 2023. It has experienced a continuous, slight downturn since the beginning of recessionary concerns.

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Not only has BATT underperformed against the S&P 500, the fund has also underperformed against several of its peers since its inception. While DRIV and BATT may have started at the same position in 2018, the gap between the two has been continuously increasing. DRIV has closely mirrored IDRV and CARZ, while BATT significantly trails each of them.

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One of the features that stands out most to me is the fund's large allocation of Tesla (TSLA) within its portfolio. As the highest weighted stock at 8%, Tesla's performance can largely influence BATT more than any other holding in the portfolio. In fact, I am particularly optimistic that the fund will benefit from the company's developments and strategic decisions that secure Tesla as the leader in the US EV market.

One such strategic decision has been Tesla's aggressive price cuts. In an effort to outperform its competitors, Tesla has announced that it will reduce its prices on all its models, ranging from $3,000 to $11,000. This decision ultimately increases demand for Tesla, while also pricing out many of its competitors that cannot similarly reduce their prices. This will definitely increase growth for Tesla, as it strengthens their position as a market leader in the EV industry.

Another strategic decision is Tesla's recent collaboration with Ford (F), where the company extended its access of 12,000 Superchargers to Ford. While this is an obvious win for Ford, Tesla's decision ultimately further secures their prevalence in the market as well as increase the number of electric vehicles on the road. After announcing this, Tesla's shares increased by 5%, and I anticipate their growth to continue as the transition towards EVs becomes more prominent. Both of these events serve as catalysts in the automotive transformation, and there is no doubt that BATT will also benefit from these industry-wide shifts as well as from Tesla's growth initiatives.

Despite China's position as a world leader in the EV market, the country is now experiencing a significant slowdown in economic growth, with its growth rate dip to its lowest in 2022 at just 3%. In my view, President Xi Jinping's campaign against private companies in China is the key driver for the nation's current economic slowdown. This effort is creating more regulation in the private market in an effort to transfer more power from private entities to the Communist Party. Unfortunately, this also limits the potential of pioneering tech companies that are at the forefront of technological advancements. As a result, there is significantly less consumer spending, which may potentially cause a slump in the EV market. This instability in the market can cause volatility in an ETF like BATT that focuses heavily on Chinese EV markets.

Statista

An example of this crackdown on private companies is seen in China's ban on the US semiconductor company Micron Technology. Micron has been selling to China for years, and the government recently banned technology companies from purchasing microchips from Micron. This is just part of a series of China's ban on US companies, fueling the conflict between the US and China. Since Micron plays a crucial role in the global supply chain and production of EVs, this ban could significantly disrupt EV industry and advanced battery spaces in both the US and China.

The EV and advanced battery industry is definitely on the cusp of significant growth, especially as favorable economic conditions propel growth in burgeoning industries after a decline in 2022. While this fund may have not historically performed the best, I would not tell investors to count out on this ETF yet. Its intensive focus on Asian markets, especially Chinese markets, gives it potential to perform extremely well as a result of China's booming EV market.

However, it is also important to consider the declining economic state China is currently facing. I rate BATT a Hold for now, until China begins to experience some form of economic recovery with a more favorable regulatory climate on private markets in China.

This article was written by

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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