Cheaper Alternatives To Tesla Hard To Find ETF Prices Reflect Accelerating Hopes

Investors are so optimistic about electric car maker Tesla Inc. that half the world would have to be driving one in a few years to justify the share price.

Tesla shares closed the year at US$829, up more than ninefold from the US$86 level where they started 2020. At that level, Tesla’s stock is trading at more than 1,650 times trailing 12-month earnings, almost 30 times sales per share and nearly 50 times book value per share. The company’s market capitalization is US$790 billion, making it the world’s sixth largest corporation, behind Apple, Microsoft, Amazon, Alphabet (formerly Google) and Facebook. Analysts and short sellers have been warning investors about Tesla for months, arguing that its shares are priced for perfection and that its stock trades well beyond any rational fundamental value.

With a net worth of US185 billion, Tesla CEO Elon Musk has passed Amazon’s Jeff Bezos to become the world’s richest person. Mr. Musk has many Canadian connections. His mother was born in Saskatchewan and he attended Queen’s University in Kingston, ON, where he met his first wife, while Mr. Musk’s current spouse, the performer Grimes, is from Vancouver, BC.

Mr. Musk is clearly a genius and Tesla is obviously the leader in electric vehicles (EV), but the EV market is not growing as quickly as Tesla’s share price reflects.

Bloomberg’s New Energy Finance (BNEF) research arm predicts that electric vehicles will account for 10% of global passenger vehicle sales by 2025, rising to 28% in 2030 and 58% in 2040. If the Bloomberg NEF forecast is correct, the EV market is not growing quickly enough for any company to trade at Tesla’s lofty levels.

For investors determined to join the EV party, there are few ways to play outside of Tesla. One competitor, Shanghai based NIO Inc. (NIO) also soared in 2020. At its year-end price, NIO had a market capitalization of about US$75 billion yet sold just 12,206 cars in the third quarter. Along with their lofty valuations, both NIO and Tesla, which has Chinese assets, carry obvious political risks.

One investor willing to accept the political risk is Warren Buffett, chairman of Berkshire Hathaway Inc., which owns 25% of Shenzhen, China-based BYD Co. Ltd. BYD makes electric-powered cars, trucks, bicycles, forklifts, buses and trains, along with batteries for vehicles and phones, and as of last year, face masks. Its ADR trades in New York as BYDDY.

Most other electric vehicle makers are small startups with volatile share prices. Among established or “legacy” carmakers, Volkswagen and General Motors are investing heavily in electric vehicles. The 800- pound gorilla in the room is Apple Inc. (AAPL), which Reuters reports is planning to release a self-driving electric car by 2024.

In my view, the best way to invest in the electric vehicle industry is to own units in an Exchange-Traded Fund (ETF) that holds Tesla and its EV competitors, together with companies that make the lithium-ion batteries and their suppliers. All ETFs eliminate company-specific risk and most reduce the risk of losses from any specific country. That said, EV sector ETFs have soared along with Tesla in 2020, making them expensive. Although they provide diversification, if Tesla suffers a setback or if political tensions with China worsen, most of these funds will fall, making them suitable as only a small part of a risk tolerant investor’s portfolio.

Here is a look at some of the ETFs offering exposure to the electric vehicle sector. Keep in mind that the Nasdaq Composite, where most of the relevant stocks trade, itself climbed about 43% in 2020.

Amplify Lithium & Battery Technology ETF (BATT)

BATT, launched in mid-2018, has US$66 million in assets allocated among 71 companies that make electric cars and batteries, and the chemical and mining companies that supply the battery makers. Fully 38% of its constituent holdings are Chinese companies. The fund counts Tesla, NIO and BYD among its top 10 holdings, together with battery-makers Contemporary Amperex Technology, Samsung SDI Corp. and Panasonic Corp., mining giants BHP Group, Norilsk Nickel and Glencore PLC, and about 60 other names. BATT units were issued at US$20 in mid-2018, then went into a long slide, bottoming out at US$6 in April 2020 before rallying to finish the year near US$16. The fund carries a Management Expense Ratio (MER) of 0.59%.

First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN)

Units in this fund, launched in 2007, never traded above US$30 until last year, when they spiked to end 2020 at more than US$70. The fund’s US$2.72 billion in assets is allocated among 44 holdings, including EV makers Tesla and NIO, lithium supplier Albemarle and solar panel makers Enphase Energy, SolarEdge Technologies and Sunrun, First Solar and Sunrun, hydrogen cell maker Plug Power, LED maker Cree and chipmaker ON Semiconductor. The fund’s gross expense ratio is 0.63%.

Global X Autonomous & Electric Vehicles ETF (DRIV)

DRIV climbed by more than 47% in 2020. The fund, launched in 2018, has US$311.2 million in assets allocated among 76 companies that are developing self-driving and electric cars or providing components for them. About 60% of the fund’s portfolio is invested in U.S. companies. Tesla is its largest holding at 5.2%, with the top 10 holdings rounded out by Qualcomm, Apple, NIO, Nvidia, Plug Power, Toyota, Alphabet (Google), Samsung and Pilbara Minerals. It carries an MER of 0.68%.

Global X Lithium & Battery Tech ETF (LIT)

This ETF almost doubled investors’ money last year, rising more than 90% in 2020. The fund, launched in 2010, offers exposure to electric vehicles via a portfolio of companies involved in lithium mining, refining and battery production. The fund’s US$2.63 billion in assets is allocated among 41 companies, fully 44% of them based in China. North Carolina-based lithium giant Albemarle accounts for 12% of its assets, with Tesla, Ganfeng Lithium, Samsung, Panasonic and LG Chem among the top 10 holdings. The fund carries an MER of 0.75%.

iShares Self-Driving EV and Tech ETF (IDRV)

This new fund, launched in 2019, had US$165.7 million in assets allocated among 100 holdings as of the end of 2020. No single holding accounts for more than 4.5% of its portfolio, which is made up of companies making self-driving or EV vehicles and their components such as Tesla, Nio, Samsung Electronics, Toyota, Apple, Advanced Micro Devices, Nvidia, Qualcomm, Alphabet (Google), and Intel. More than 50% of IDRV’s holdings are based in the United States, with 10% each from Germany, South Korea and Japan and less than 5% from China. The fund’s net asset value climbed by 58.6% in 2020. IDRV carries an MER of 0.47%.

Invesco WilderHill Clean Energy ETF (PBW)

This fund achieved a 198% return in 2020, yet its average annual return since its launch in 2005 is just 2.35%, an indication of how much the sector is suited only for momentum investors. The fund has US$2.77 billion in assets spread among a roughly equally-weighted collection of 56 clean energy companies, with most names accounting for about two per cent of the portfolio. Tesla and NIO are on the list, along with a broad assortment of companies that make electric vehicles, solar panels or lithium batteries. The fund carries a total expense ratio of 0.7%.

SPDR S&P Kensho Smart Mobility ETF (HAIL)

HAIL, launched in 2017, has US$129.5 million in assets allocated among 59 companies. The diversified portfolio includes companies focused on autonomous and connected vehicle technology, drones and advanced transportation tracking systems. Its holdings include Tesla, NIO, Canada’s Ballard Power Systems, rideshare companies Uber and Lyft, and legacy automakers General Motors, Honda, Ford, Fiat Chrysler and Toyota. The fund’s net asset value climbed 77% last year. HAIL’s gross expense ratio is 0.45%.

Van Eck Vectors Low Carbon Energy ETF (SMOG)

The unit price of SMOG, like many others in the sector, more than doubled in 2020. The fund, launched in 2007, has US$321 million allocated among 30 companies focused on alternative energy such as bio-fuels, wind, solar, hydro and geothermal sources. Wind turbine maker Vestas Wind Systems is the fund’s largest holding, followed by Tesla and NIO. The fund has a gross expense ratio of 0.65%.

Conclusion

The hype surrounding Tesla has attracted investors to other EV makers and their suppliers, raising the prices of individual stocks and the unit prices of ETFs linked to the industry. Despite their diversification, ETFs in the EV sector are volatile. Figures from Morningstar show that the least volatile ETF among the funds described above is IDRV, whose units fell 23.5% in its worst three-month period, while the most volatile is SMOG, which fell more than 60% in its worst quarter. The other funds fell somewhere in between. BATT’s large allocation to BYD Co. Ltd., in which Berkshire Hathaway has a 25% stake, appears to make it the least risky, but even then, it should account for only a tiny portion of a risk-tolerant investor’s portfolio.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca