You don’t need to be a fan of cars to know that electric vehicles (EVs) are gaining popularity.
A common sight on Singapore’s roads is the diminutive BlueSG electric car, while American electric car maker Tesla (NASDAQ: TSLA) launched its Singapore operations in early 2021.
The famous electric car manufacturer recently opened a dedicated showroom at Millenia Walk.
With EVs gaining widespread popularity globally, it is little wonder that investors see a lucrative investment opportunity in this space.
Jumping on this bandwagon is Nikko Asset Management (Nikko AM).
The Japanese fund manager has announced that it will list the brand-new NikkoAM-StraitsTrading MSCI China Electric Vehicles and Future Mobility ETF.
Aiming to replicate the MSCI China All Shares IMI Future Mobility Top 50 Index, the ETF contains 50 Chinese companies in the business of energy storage, autonomous vehicles, shared mobility, and new transportation methods.
The ETF debuted on the Singapore Exchange (SGX: S68) on 20 January 2022.
World’s largest EV market
China is already a dominant force in the electric vehicle market.
As of August 2021, the country had already 800,000 EV chargers installed, and Bloomberg estimates that by 2025, over 50% of new global EV sales will be attributed to China.
China also dominates the global production of lithium-ion batteries, a key component for EVs, while a host of new government policies also serve as strong tailwinds for the industry.
But the ETF’s greatest potential may not lie in EVs alone, but in future mobility (FM).
FM covers a spectrum of businesses such as driverless cars, intelligent traffic control, vehicle-to-vehicle communication, fleet management, hydrogen cars and high-speed transportation.
The forecasts are bullish for China.
According to McKinsey, autonomous vehicles (AVs) could account for as much as 66% of passenger-kilometres travelled in China by 2040, which would generate US$1.1 trillion of revenue from mobility services, and US$0.9 trillion from the sales of AVs by that year.
About the ETF
As with every ETF out there, here are some key factors you should consider.
For flexibility, the ETF will be offered in both an SGD (SGX: EVS) and a USD (SGX: EVD) version and investors can enjoy direct access to China’s “A” shares.
The minimum lot size is also just one share, while the expense ratio is capped at a relatively affordable 0.70%, factors that should increase the ETF’s accessibility to investors.
The index has delivered a strong performance since its inception, with an annualised net return of 38.53% between 31 May 2018 and 31 December 2021.
Key constituents
Before buying a sector-focused ETF, it is important to familiarise yourself with its constituents.
For this new ETF, consumer discretionary companies form the largest segment of the ETF with a 37.9% weightage, followed by industrials (29.3%) and materials (28.9%).
The largest constituent company is Contemporary Amperex Technology Co (SHE: 300750), or CATL.
The company comprised more than 12% of the index as of 22 November 2021.
CATL is a global leader of new energy innovative technologies, specialising in the manufacture of lithium-ion batteries for EVs, energy storage and battery management systems.
Some of the company’s customers include Tesla, BMW (ETR: BMW), Hyundai (KRX: 005380) and Volkswagen (ETR: VOW3).
The company has also announced plans to launch a sodium-ion battery by 2023 as an evolution of lithium-ion batteries.
Also included in the index are carmaker Nio (NYSE: NIO) and Geely Automobile Holdings (SEHK: 0175), with weightages of 9.71% and 9.32% respectively.
Main risks
Before you buy this ETF, do consider the risks involved.
While an ETF can offer instant diversification, a sector-specific ETF such as NikkoAM’s latest offering does come with industry-related risks and will not shield you from events that negatively impact the sector.
Hence, you might still be exposed to concentration risk even if you do own a portion of the 50 stocks within the ETF.
In addition, you also run the risk of geographic concentration with the China-focused investment strategy of the ETF.
Investors should also watch out for the ETF’s tracking error over time.
A large tracking error means that the fund is unable to replicate the returns of the underlying index, which is not something you want to face.
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Disclosure: Herman Ng does not own shares in any of the companies mentioned.
