Author's note: Added some additional context concerning BATT's switch from active management to passive index-tracking on Oct. 12, 2020.
In the days since the U.S. presidential election, we've seen a bump in many cleantech and cleantech-adjacent ETFs, as green industries ranging from solar photovoltaics to electric vehicles have been buoyed by Biden's win.
One ETF particularly feeling the juice is the $1.1 billion Global X Lithium & Battery Tech ETF (LIT), which tracks a global portfolio of lithium miners and battery producers. Over the past month, LIT is up 16%, compared to the 2% increase of the SPDR S&P 500 ETF Trust (SPY).
On a year-to-date basis, though, LIT's performance is even better: Since Jan. 1, the fund is up an eye-popping 82%.
Yet LIT's next nearest competitor, the $12 million Amplify Lithium & Battery Technology ETF (BATT), which also tracks global battery companies and miners, hasn't seen nearly the same outsized gains. Over the past 30 days, BATT is up only 10%, while year to date, the fund has risen just 12%:
LIT Versus BATT
Source: StockCharts.com; data as of Nov. 11, 2020
Why is LIT so, well, lit, while BATT has lagged behind? The key, as always, is in the holdings.
LIT vs. BATT: Significant Portfolio Overlap
Among the six metals and mining ETFs, three specifically track the production supply chain for the materials used in making next-gen batteries. Lithium is the best known of these materials; other important ores include cobalt, nickel, manganese and graphite.
Although LIT and BATT target specifically lithium miners, they are sometimes grouped together with the $192 million VanEck Vectors Rare Earth/Strategic Metals ETF (REMX), which has a much broader scope.
This isn't an apples-to-oranges comparison, however. REMX's focus is on rare earth metals, such as cerium or tungsten, as well as rare materials kept in the U.S. government's “strategic stockpiles.” As such, REMX's portfolio of strategic metals miners and chemical companies overlaps very little with LIT or BATT: According to ETF Action's overlap screener, there is only 4% portfolio overlap between REMX and LIT, and 6% overlap between REMX and BATT.
Meanwhile, LIT and BATT's portfolios share roughly 47% of the same names and in the same weights. So how can their performance be so divergent?
Sectors Tell The Story
In large part, it's a story of sectors. LIT and BATT may have similar holdings, but their sector breakdown significantly differs, according to our ETF Comparison Tool:
For a larger view, please click on the image above.
Source: ETF Comparison Tool; data as of Nov. 11, 2020
More than half of BATT's portfolio is allocated to specialty mining and metals companies, compared to just 3% of LIT's portfolio. The fund also holds uranium (3%), gold stocks (3%) and even coal miners (3%)—one of the worst-performing miner sectors of 2020.
On the other hand, LIT's highest weighting is in electrical components and equipment manufacturers (29%), a segment that doesn't even show up in BATT; ditto for LIT's 18% weighting in auto and truck manufacturers. The fund also has nearly double the allocation in commodity chemicals as BATT (25% versus 14%).
In other words, despite hefty crossover in individual stocks, BATT's primary focus is on the metals themselves—the production side of metals production. Meanwhile, LIT focuses on the end applications of those metals. This makes all the difference.
More Than Tesla Returns
In terms of individual holdings, it might be tempting to assume that LIT's allocation to Tesla (TSLA)—up 390% year to date—has hypercharged the fund's overall performance. But Tesla only tells part of the story. In fact, LIT holds several high-flying stocks, such as Chinese car battery maker, BYD Company, which is up 375% year to date; or Canadian miner Lithium Americas Corp., up 205%.
All told, 12 of the stocks in LIT's portfolio—or 47%—have increased by at least 100% over the course of 2020.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
What's strange, however, is that BATT actually has more stocks in its portfolio that have posted enormous YTD gains. Sixteen of its holdings, or fully half its portfolio by weight, have risen higher than 100% so far in 2020. One company in particular, Nio Inc (NIO), is up an astonishing 934%.
Yet it's not enough. Given its metals and mining focus, BATT ends up allocating a bigger chunk of its portfolio to worse-performing mining and processing stocks. As of Nov. 11, BATT had 16 companies in the red for 2020, with an average decline among them of 21%. That's roughly 18% of BATT's total portfolio.
Meanwhile, LIT holds only seven stocks with negative returns this year, comprising just 5% of LIT's total portfolio.
Mining Is A Tough Beat
The moral of the story here is that sector tilts matter, and it's as important for investors to understand what stocks might be dragging down an ETF's performance as much as the ones providing its tail winds.
Even in the best of times, mining is a tough industry, and by allocating so heavily to it for most of the year, BATT has struggled to capture the same outsized gains as its competition. However, in October, BATT changed from active management to an index that includes electric vehicle and battery technology stocks--which likely explains why the gap between BATT and LIT's returns has narrowed over the past month.
Given that change, we'd expect BATT and LIT's returns to look far more similar, moving forward.
Contact Lara Crigger at firstname.lastname@example.org