The auto industry is going through an evolution.

There is a common belief that change will happen overnight: someone will finally perfect self-driving technology, an electric battery with extended range will hit the market, and suddenly all non-autonomous, gas and diesel vehicles will become obsolete, quickly vanishing from the roads. The reality is much more complicated – change is happening now, and it’s happening faster than you think. The vehicles we drive are gradually becoming autonomous, connected, electric and shared.

As the portfolio manager of Canada’s first exchange-traded fund (ETF) dedicated to automotive innovation, two specific trends have caught my attention: the increased adoption of electric drivetrains and the growth of self-driving technology. While major automakers are playing an important role, the most exciting part of this evolution is the number of independent suppliers and start-ups that are trying to be the first to make a major breakthrough. It’s reminiscent of Silicon Valley in a previous era.

The shift to electric drivetrains has been gradual. While Tesla continues to grab the spotlight with flashy product announcements like the new Roadster and their Semi Truck, hybrid vehicles are continuing to grow in both popularity and market share. The hybrid vehicle itself isn’t a new concept: one of the best-known hybrid vehicles, the Toyota Prius, has been on the road in Japan since 1997 and in North America since 2000. During that time, substantial incremental improvements have been made to battery technology.

That may be one reason why Volvo announced earlier this year that they are moving to an all-electric product lineup by 2019, representing a substantial shift towards electric vehicles. More recently, Volkswagen Group announced a commitment to offer an electric or hybrid option for each of the company’s 300 vehicle models by 2030. This commitment extends to all 12 of Volkswagen’s brands, including high-performance subsidiaries: Audi, Porsche and Lamborghini.

There is enough potential in the drivetrain sector that one of the largest parts suppliers, Delphi Automotive, recently split into two companies: Delphi Technologies, focused exclusively on the powertrain segment, including electric drivetrains; and Aptiv, which will focus on the electronics required to power self-driving vehicles. This focus was made even clearer in October when Aptiv acquired nuTonomy, a startup that has been working with ride-sharing service Lyft to test self-driving cars on the streets of Boston.

Self-driving vehicles aren’t as close to full-scale commercialization as they may seem, at least judging by media headlines, but many of the underlying technologies required to enable autonomous vehicles have been commercially available for some time. In the 2009 model year, Ford introduced Active Park Assist. This feature originally enabled a car to parallel park itself but was later expanded to include support for perpendicular reverse parking. Many other manufacturers have also developed similar features.

Even without the full adoption of self-driving, vehicle safety is increasing. For example, auto manufacturers were able to implement the park assist feature thanks to the introduction of backup cameras in higher-end vehicles. It was originally billed as a premium convenience option for drivers. The safety benefits of increased rear visibility led regulators in both Canada and the United States to require the inclusion of backup cameras in all new passenger vehicles sold, starting in May 2018.

While much of the attention in this space seems to be focused on passenger transportation, I think it is more likely that autonomous technology finds staying power in the commercial transportation sector. Tesla has received significant attention for the Autopilot feature in their line of passenger cars, but I am particularly interested in the potential incorporation of the technology in their forthcoming Semi Truck. A number of major North American retailers have already placed orders for the electric truck, including Walmart and Loblaws. Orders should increase as additional companies embrace the idea of low-carbon transportation.

Unlike passenger transportation with its unpredictable routes and destinations, many shipments in the retail industry are between a fixed distribution centre and specific store locations. If a truck frequently drives between these two points using the same route, it substantially reduces the number of variables that would have been overcome to enable self-driving. It could be the perfect way for Tesla to showcase the full potential of their Autopilot technology.

Ironically, the only predictable thing about this sector is its unpredictability. Established automakers, innovative startups and industry disruptors are all investing unprecedented amounts in R&D for the technologies that will power the autonomous, connected, electric and shared vehicles of the future. The Evolve Automobile Innovation Index ETF (TSX: CARS) provides investors with the opportunity to benefit from the momentum of the overall sector, not just a single company.

Elliot Johnson | Chief Operating Officer | ejohnson@evolveetfs.com

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