When many investors think of electric vehicles (EVs), they think of Tesla, Inc. (TSLA), but at a time when that stock is down more than 42 percent year-to-date, considering other opportunities in the EV arena may be prudent.
The EV investment thesis is undoubtedly thematic , making stock picking in this area tricky, but that increases the allure of exchange traded funds (ETFs). As the EV theme has gained traction in recent years, ETF issuers have met perceived demand with new products, including the Global X Autonomous & Electric Vehicles ETF (DRIV). DRIV is just over a year old and targets the Solactive Autonomous & Electric Vehicles Index.
It would make sense for DRIV to have a sizable Tesla allocation. Fortunately, at least for the time being, the ETF does not have a massive Tesla weight. Rather, DRIV is a broad ecosystem play on autonomous and electric vehicles. The fund's 77 holdings range from semiconductor makers to software firms to producers of crucial EV materials such as lithium and cobalt.
That diversity is meaningful, but DRIV has been pinched Tesla's recent woes, as evidenced by a month-to-date decline of 12.17 percent (as of Wednesday, May 22).
A Big Runway For Growth
As is noted above, DRIV is a thematic ETF. Many thematic ETFs, regardless of the underlying theme, share at least two traits in common. These funds are designed to give investors exposure to fast-growing opportunities and these products usually come to market when those opportunities are still in their formative stages.
That is the case with EV funds. Battery-powered electric vehicles represent just 2.1 percent of global new auto sales, the equivalent of 2 million vehicles. Sales of EVs are forecast to jump to 2.7 million this year, but that is still a scant percentage of the overall global automotive market.
One of the primary catalyst for increased EV adoption is price parity with traditional internal combustion engine (ICE) automobiles. Estimates vary as to when EVs will reach price parity or become cheaper than ICE automobiles, but BloombergNEF recently said that price parity could be attained by 2022 , an improvement over its previous estimate of 2025.
“It’s important to note that an EV’s price tag is primarily driven by the cost of its battery,” said Global X in a recent note . “Four years ago, batteries represented around 57% of the total price of a medium-sized EV. Yet by 2030, the cost is expected to fall to just 14%, setting a trajectory that should allow EVs to reach price parity with ICE vehicles by the mid-2020s.”
A Safer Idea
The average market capitalization of DRIV's holdings is $70.47 billion, which is large relative to other thematic ETFs. DRIV's roster is buoyed by the likes of Apple Inc. (AAPL), Microsoft Corp. (MSFT) and NVIDIA Corp. (NVDA), among other well-known tech titans.
DRIV's standard deviation of 20.60 percent is high enough that the fund probably is not appropriate for some investors, but its volatility metrics are only slightly higher than some large Internet funds .
For extremely patient investors, DRIV could prove rewarding as EV adoption increases.
“Yet, when EVs become noticeably cheaper than ICE vehicles by 2030, economics should trump consumer inertia. Estimates suggest penetration rates could range from 20% to 50%,” according to Global X.