“Electric Vehecle” Themed Index Creation and Existing ETFs – CARZ, EKAR, DRIV, and XKST

When it comes to creating an “electric vehicle” themed fund, the first question we ask is “is there any existing one in the market and how is it/are they doing?”, then we can compare our approach and performance to existing ones to gauge if ours has a competitive edge.

CARZ, EKAR, XKST, DRIV, KARS are close to what we aim to do.

CARZ has attracted $21.04 million since the inception in 2011. It’s a global automakers fund. In another word, it has big stakes in the brand-name companies that manufacture the cars you see on the road—Toyota, Daimler, etc.—but no positions in the upstream part suppliers and accessory manufacturers. Nearly 80% of the fund is allocated to American, German, and Japanese automakers. The strategy still appeals to some people. The fund is fairly diversified globally but light on emerging markets in general. CARZ charges 70 bps for this exposure, not low, which might be the reason our client is gravitated to compete with.

CARZ tracks NASDAQ OMX Global Auto Index, which is based on ICB system under the code 3353 as Automobile Manufacturer. Back in 2011, when the fund just started, top holdings are Daimler Ag, For Motor Co, General Motors Co, Toyota Motor Corp, Honda Motor Co, Hyundai Motor Co, Kia Motors Corp, Volkswagen Ag, Bayer Motor Werks, and Nissan Motor Co. While the holdings today as of March 2017 are: Daimler Ag, Honda Motor Co, Ltd, Toyota Motor Corp, General Motors Co, For Motor Co, Hyundai Motor Co, Suzuki Motor Corp, Tesla, Inc, Nissan Motor Co. Ltd, Bayer Motor Werks, Fuji Heavy Industries Ltd. We see Volkswagen and Kia were displaced by Suzuki and Tesla now. Even Tesla is added, the index doesn’t catch up with the new theme of “driverless” automobile manufacturing. “Driverless” cars or Autonomous cars are equipped with top-notch sensors and software to detect environment so there is no need for a chauffeur to sit behind the wheel.

Seeing it as an unavoidable future path, the unconventional car makers such as Google parent Alphabet Inc. has carved out a driverless unit – Waymo and is hiring rental car company Avis Budget Group Inc. to build up a network of taxi services without drivers. Apple is working with Hertz to test out self-driving vehicles (http://www.cnbc.com/2017/06/26/hertz-shares-soar-after-report-apple-working-to-manage-small-autonomous-fleet.html). Let alone to mention that conventional and giant car manufacturers such as Volvo, BMW, Ford are also trying hard to forge into this space.

The proactive participation of unconventional players such as Google and Apple reflect the revolutionary attributes of EV that conventional gasoline-fueled cars do not possess. The DNA footprint is fundamentally altered inherently even though the two kinds of cars can be made similar outlook. The EVs are

– clean – no need to pump liquid gasoline all the time;
– intelligent – automatic face/body shape recognition, driving habit perception, which can be connected to the insurance company, let along to talk about the driverless capacity, of which, intensive research work are undergoing ;
– flexible – in the future when wireless charging is developed and commercialized.

Limited by the industry classification system ICB, the automobile manufacturer sector 3353 doesn’t have the capacity to include this technology element into automaker grouping, hence, investors who want to exploit the auto future with driverless concept need to find other products, which leave an ample room for indexer/ETF issuers to fulfil this demand.

The Global X Autonomous & Electric Vehicles ETF (DRIV) tracks the index relying on artificial intelligence to score and select the top companies from three categories: 15 from electric vehicles; 30 from electric vehicle components and 30 from autonomous vehicle technology. Each constituent is weighted on a modified market-capitalization approach that caps the weights of individual securities. The index is reconstituted every six months. The expense ratio of  DRIV is 0.68%.

Top 20 index components by weighting are: Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), Toyota (NYSE:TM), Apple (NASDAQ:AAPL), Samsung (), Cisco (NASDAQ:CSCO), Texas Instruments (NYSE:TXN), Nvidia (NASDAQ:NVDA), Alphabet (NASDAQ:GOOGL), BHP Billiton (NYSE:BHP), Qualcomm (NASDAQ:QCOM), Daimler (OTCPK:DDAIF), Honda (NYSE:HMC), Rio Tinto (OTCPK:RTPPF) Honeywell (NYSE:HON), Baidu (NASDAQ:BIDU), Micron (NASDAQ:MU), General Motors (NYSE:GM), Ford (NYSE:F) and Volkswagen (OTCPK:VLKAY). BMW (OTCPK:BMWYY) and Tesla (NASDAQ:TSLA) are both further down the list of components of the index. A couple of other notable components are Cree (NASDAQ:CREE), Albemarle (NYSE:ALB) and Alcoa (NYSE:AA)

The Innovation Shares NextGen Vehicles & Technology ETF (EKAR) launched in February and has $2.5 million in assets under management. It charges 0.65%. the KraneShares Electric Vehicles and Future Mobility Index ETF (KARS) launched in January 2018 with an expense ratio of 0.69%. It has $27.3 million in assets. It ties to Solactive Electric Vehicles and Future Mobility Index. The selection rules are detailed in its methodology guide. In short, companies classified in any of the following four sub-industries (‘Fuel Cell Equipment and Technology Providers’, ‘Heavy-Duty and High-End Batteries Manufacturing’, ‘Video Multimedia Semiconductors’ and ‘General Analog and Mixed Signal Semiconductors’) are in general eligible for inclusion in the final index composition. The caveat in their methodology is that they have to hard-wire the following three companies: Albermale Corporation (ISIN: US0126531013, RIC: ALB.N), FMC Corporation (ISIN: US3024913036, RIC: FMC.N) and Quimica Y Minera Chil-SP ADR (ISIN: US8336351056, RIC: SQM.N). As a result, they claim the index includes electric vehicle production, autonomous driving, shared mobility, lithium and/or copper production, lithium-ion/lead acid batteries, hydrogen fuel cell manufacturing, or electric infrastructure.

DRIV, EKAR uses artificial intelligence and natural language processing to pinpoint companies involved in the targeted industry.

XKST, launched by State Street at the end of 2017, tied to Kensho – now part of S&P – Kensho Smart Transportation Index. According to its website,  the index is constructed based on “an entirely rules-based methodology to objectively uncover companies involved in the Smart Transportation 21st Century Sector℠, and is comprised of those companies in the Kensho® Autonomous Vehicles℠ Index (KCARS), the civilian/commercially focused components of the Kensho® Drones℠ Index (KDRONE), and the Kensho® Advanced Transport Systems℠ Index (KATS). Only those companies with a market capitalization of $100mm and a 3 month average daily traded value (ADTV) of $1mm as of the most recent index selection date are eligible to be included in the index.”  The top components are: NVDA  NVIDIA Corporation 5.6% CAR Avis Budget Group, Inc. 5.5%ALV Autoliv, Inc. 5.5%SIRI Sirius XM Holdings Inc. 5.2%FTV Fortive Corporation 4.8%WBC WABCO Holdings Inc. 4.3%VC Visteon Corporation 4.1%TRMB Trimble Inc. 4.1%APTV Aptiv PLC 3.9%FCAU FIAT CYLR.AUTOS. (NYS).

It asks a reasonable expense ratio of 0.45% but only has accumulated $4.5 Million since, far less than that of KARS, which was issued to the market later and by a much smaller player-Kranshares, moreover, XKST’s fee is 0.69%, 25bps higher than XKST’s. I view it is due to an inborn flaw in the Kensho’s methodology purely based on natural language processing. Excepting Nvidia, names like Avis, Fortive, Vesteon… don’t fit into the fundamental concept of EV at all.

 

 

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