This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Long-term demand for lithium is likely to be strong. This stems largely from the electric-vehicle (EV) revolution, led by Tesla (NASDAQ: TSLA), and the increasing popularity of energy-storage products. Lithium is a key component of lithium-ion batteries, which are the most common type of batteries for EVs and are also used in energy-storage products.
Let's take a look at the Lithium & Battery Tech ETF (NYSEMKT: LIT), which became the world's first lithium-focused exchange-traded fund (ETF) when it launched in 2010. You might decide that one or more of this fund's holdings are worth at least putting on your watch list or that you want to buy the ETF itself.
The Lithium & Battery Tech ETF: Long-term performance and the basics
This ETF began trading in July 2010. Since its inception, it's gained 204% through Jan. 14, 2022. This performance lags that of the broader market, as the S&P 500 index returned 448% over this period. However, over the five-year period, this ETF has handily outperformed the S&P 500, as the below chart shows.
The Lithium & Battery Tech ETF is an index fund that's designed to track the performance of the Solactive Global Lithium Index, which consists of stocks involved in the full lithium cycle, from mining and refining the metal through battery production. It had 41 holdings as of Jan. 13. The fund has an expense ratio of 0.75%, which is a little high for an index fund, in general, but in line with thematic index-based ETFs.
Shares of companies based in China accounted for about 45% of the fund's total value, as of Jan. 13. The United States follows right after with a 22% weighting.
This ETF is not a pure play. Many of the companies in its portfolio are involved in some operations that have nothing to do with the lithium life cycle.
The Lithium & Battery Tech ETF: Top 10 stock holdings
| Holding No. | Company | Market Cap | Country | Projected Annualized EPS Growth Over Next 5 Years** | Weight (% of Portfolio) | 1-Year / 5-Year Returns |
|---|---|---|---|---|---|---|
| 1 | Albemarle (NYSE: ALB) | $27.3 billion | U.S. | 29.8% | 11.00% | 29.2% / 167% |
| 2 | Tesla | $1.1 trillion | U.S. | 79.3% | 5.92% | 24.2% / 2,110% |
| 3 | TDK (OTC: TTDKY) | $15.0 billion | Japan | 23.2% | 5.83% | (28.8%) / 85.6% |
| 4 | EVE Energy* | 212.99 billion Chinese yuan (CNY) = approximately $33.5 billion | China | N/A | 4.86% | 26% / 611% |
| 5 | Contemporary Amperex Technology* (often called CATL) | 1.346 trillion CNY = approx. $212 billion | China | 57.1% | 4.85% | 56.5% / N/A |
| 6 | BYD (OTC: BYDDY) | $98.9 billion | China | 11% | 4.60% | (6.5%) / 518% |
| 7 | Panasonic (OTC: PCRFY) | $27.0 billion | Japan | 26% | 4.51% | (6.2%) / 22.3% |
| 8 | Samsung SDI* | 42.817 trillion South Korean won (KRW) = approx. $36.0 billion | S. Korea | 51.3% | 4.50% | (13.6%) / 460% |
| 9 | Yunnan Energy New Material* | 229.616 billion CNY = $36.1 billion | China | 69.1% | 4.42% | 93.7% / 1,554% |
| 10 | LG Chem* | 52.77 trillion KRW = approx. $44.3 billion | S. Korea | 6.9% | 4.34% | (29.1%) / N/A |
| Overall LIT ETF | N/A | $5.5 billion (assets under management) | N/A | N/A | 100% | 20.9% / 242% |
| N/A | S&P 500 | N/A | N/A | N/A | N/A | 24.6% / 125% |
Data sources: LIT ETF, Yahoo! Finance, and YCharts. *Not traded on a U.S. exchange; market caps for these stocks calculated by writer using current exchange rates. **Analyst consensus estimates. EPS = earnings per share. Bolded returns = outperformed the S&P 500. Data to Jan. 14, 2022.
Below is a brief description of the ETF's top-six holdings.
Albemarle (No. 1) is one of the world's largest lithium miners. Its primary lithium sources are brine in Chile and Nevada and hard rock (via a joint venture) in Australia. In the third quarter of 2021, its lithium business accounted for about 43% of total revenue, while its bromine and catalysts businesses contributed 33% and 23%, respectively.
What other lithium miners are in this ETF? China's Ganfeng Lithium (No. 12), Chile's SQM (14), Australia's Pilbara Minerals (18), the U.S.'s Livent (22), Canada's Lithium Americas (27), Canada's Standard Lithium (35), Australia's Ioneer (36), and Australia's Piedmont Lithium (37). Ganfeng, SQM, and Livent are larger, well-established lithium producers. The others are junior miners, mostly in the development stage. Some are more speculative than others.
Tesla, No. 2, is best known for pioneering premium electric cars. It also has a residential solar-energy business and an energy-storage business targeting a variety of markets. The company and its partner Panasonic produce lithium-ion batteries at its Gigafactory in Nevada.
TDK (No. 3) is an electronics-component manufacturer that has four business segments: passive components, sensor-application products, magnetic-application products, and energy-application products. In its fiscal year ending March 2021, its energy-application business accounted for 50% of its total sales. One of this business' two main products is lithium-ion batteries for PCs and smartphones, including Apple's iPhone.
EVE Energy and Contemporary Amperex Technology (CATL) round out the fund's top five holdings. Both make lithium batteries. CATL is the world's largest maker of electric-car batteries, according to The New York Times.
I had originally planned to stop at No. 5, but couldn't resist including one more -- BYD -- because it's worth putting on your watch list. Investing legend Warren Buffett would surely agree, as his Berkshire Hathaway owns a big stake in the company. BYD is one of the world's largest manufacturers of EVs and sold the most electric cars in China in 2021. It also makes other products, including rechargeable batteries for various applications.
A decent way to invest in the lithium life cycle with a big caveat
The Lithium & Battery Tech ETF looks like a decent way for investors to get exposure to the lithium life cycle from mining through the production of lithium-ion batteries. Keep in mind the downside of ETFs is the same as their advantage: diversification.
The "big caveat" mentioned in the subheading? The ETF's heavy concentration in Chinese stocks means it's only a good fit for investors comfortable with relatively high volatility and risk. China is an emerging market (or developing country), which increases its economic and currency risk relative to the U.S. and other developed nations. Moreover, trade issues are a concern, as U.S.-China trade relations have been particularly contentious in recent years.
In my view, Albemarle is the best lithium stock for most investors. It's well-established and even pays a modest dividend, currently yielding about 0.7%. (I'm not including Tesla as a "lithium stock," as it's much better classified as an EV stock.)
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
