Invesco Ltd., spurred in part by institutional investors seeking commodities exposure that didn’t involve fossil fuels or a particular tax document, recently launched an exchange-traded fund that puts a new spin on the electric vehicle ETF by applying the pedal to the metals.
The Invesco Electric Vehicle Metals Commodity Strategy No K-1 ETF, launched April 27, is the first commodities ETF to offer exposure to an electric vehicle theme, according to Jason Bloom, head of fixed income and alternatives ETF strategy at Invesco.
“All of the other EV-focused ETFs out there are investing in equities of operating companies that operate somewhere in the supply chain,” Mr. Bloom said.
Instead, the Invesco fund invests in commodity-linked futures and other financial instruments that offer exposure to metals commonly used to produce EVs. The actively managed fund, which aims to outperform its benchmark, the S&P GSCI Electric Vehicle Metals index, held nickel, copper, aluminum, cobalt, and iron ore futures as of May 24, according to Invesco’s website.
Structured in accordance with the Investment Company Act of 1940, the $24.1 million fund also avoids generating a federal tax document for investors called a Schedule K-1. For institutional investors such as qualified plans, K-1s have potential to create “operational complexity for them from an accounting standpoint,” Mr. Bloom said.
The electric vehicle metals ETF’s launch brought the number of funds in Invesco’s commodities ETF suite in the U.S. to 10, the largest of which is the $9.1 billion Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF. That fund ranks as the largest ETF in Refinitiv Lipper’s commodities general funds classification. In 2022 through April 30, it returned 33.6% and attracted an estimated $2.7 billion of net investor inflows, Lipper data shows.
While commodities have historically served as a potent inflation hedge, the problem institutional investors face is that, as they have become more environmental, social, and governance-aware, broad-based commodity allocations involving fossil fuels have become “problematic,” Mr. Bloom said.
“We’re kind of excited about this fund because a lot of investors have come to us and said, ‘Hey, what no-K-1-commodity exposure can we get that doesn’t have fossil fuel exposure?'” he said, adding that until Invesco launched the new ETF, it “really didn’t have anything for them.”
Mr. Bloom declined to name those institutional investors, but said they included state retirement plans, as well as registered investment advisers, and outsourced chief investment officer groups that manage money for small- to medium-sized pensions funds.
Ben Johnson, director of global exchange-traded fund research for Morningstar Inc., agreed that the fund is a first-of-its-kind offering.
“To date, EV-focused ETFs have all invested exclusively in stocks, and no commodity ETFs have focused on a basket of metals that will benefit from growth in the space,” Mr. Johnson said, adding, however, that ESG investors “should probably take a long, hard look at how these metals are extracted from the ground.”
While the metals are being extracted in the name of reducing fossil fuel dependency, “there’s a lot of (greenhouse gas) emissions that are being created in the process,” he said.
And, noticeably absent from the list of things the ETF invests in is one of the “prime beneficiaries” of the transition to EVs — lithium, Mr. Johnson said. According to the U.S. Department of Energy’s Alternative Fuels Data Center, most of today’s all-electric vehicles and plug-in hybrid electric vehicles use lithium-ion batteries.
While some miners operate more responsibly than others, and investors may have concerns about investing directly in a company that wasn’t managing its environmental impact well, the commodity itself isn’t good or bad, Mr. Bloom said. Consequently, the fund offers a way for investors to get direct exposure to essential building blocks for EVs without necessarily having to invest in a company with an ESG score “that may or may not pass muster,” he said.
As for lithium, many people have asked why it’s not in the portfolio, Mr. Bloom said. While the ETF doesn’t currently invest in lithium, “it’s on the menu,” he said.
“It’s just that the lithium futures don’t meet the minimum liquidity thresholds, and every six months we reevaluate,” Mr. Bloom said. “So, something like lithium can come into the portfolio once it meets those liquidity thresholds from an investability standpoint and a risk-management standpoint.”
Invesco’s impetus to bring the EV fund sprang both from institutional investors’ requests as well as its own research, he said. Around the same time last year that the institutional investors were making those requests, Invesco’s research was indicating that demand for those EV-related commodities was likely to spike, Mr. Bloom said.
“…We were coming to the realization based on demand and supply forecasts that the energy transition was likely to spark an accelerated growth in demand for these critical minerals,” he said. “And when you looked two or three years out — this was a year ago — those demand curves started to pull away from the projected supply curves.”
Mr. Bloom cited an executive order President Joe Biden signed on Aug. 5, 2021, that set a goal for half of all new passenger cars and light trucks sold in 2030 to be EVs.
“We don’t have current capacity within the mining industry to meet that demand,” he said, adding that if President Biden wants EV production to increase dramatically in eight years but it takes 10 years to get a new mine permitted, it’s likely that higher prices will be needed not only to stimulate capital investment from the mining industry but also to get the attention of regulators, “who need to come up with a workable permitting process.”
“The risk-reward looked really good to us,” he said.
Atlanta-based Invesco had about $1.6 trillion in assets under management worldwide as of March 31.