Today was the first day for the Global X Autonomous & Electric Vehicles ETF (DRIV). It comes out second to the Innovation Shares NextGen Vehicles & Technology ETF (EKAR). This is a fascinating theme because there is so much that is right with it and so much that is wrong with it.
What is right is the move from fossil fuel to electric would seem to be great news for the planet. What is wrong is almost every aspect of the Tesla (TSLA) story. It continually has production problems and cash raises, its debt was recently downgraded and it should not be a shock if there are more downgrades subsequently. The stock is very overvalued. It has a $48 million market cap and it looks like it sold 101,000 cars last year. GM has a $54 billion market cap, I didn't want to make a day of it but I found that it sold 275,000 vehicles just in August last year. If you own Tesla, are you hoping it catches up to GM? Even if it does catch up, what you are betting on then is a massive PE expansion (for now there is no PE, it loses money).
The religious like devotion to the name is a behavior that has repeated before and has precedence of ending badly (Iomega and AOL). The cars are good looking and maybe they are great cars, or not, but the production, the cash burn and the debt will all be very difficult to grow out of.
I personally can't get over the April Fools tweet from Elon Musk about being bankrupt. I manage the Facebook page for Walker Fire (why don't you click through and give us a like) and I have posted an April Fools two years in a row and got people both times. The first one I altered a picture of one of our trucks (see below) to make it green and said we were going to paint all the trucks green. A couple of people were ticked and thought it was a waste of money, I even got one of our senior firefighters. This year I used an app to make it look like our Type 1 Engine (structure fire rig) raced in the Mint 400 desert race and that the 3rd place prize money wasn't enough to pay for the damage caused by driving 90 mph through the desert and got one person. There was no consequence but if someone took some sort of action based on Musk "claiming bankruptcy," that would seem to be a huge problem. Will there be other stupid things like this from TSLA's C-suite?
One aspect of theme I can't wrap my head around is self-driving cars. This might be a generational thing. The idea of going on a road trip and wanting the car to take over for a couple of minutes for a phone call or opening a Quest Bar (like a Cliff Bar but with 1/10th the carbs) to eat is an aspect of convenience I can envision but not driving at all is something I can't envision and wonder if maybe I am not alone in that thought.
As to the EKAR and DRIV, they are a mix of auto manufacturers and tech companies. Another issue with Tesla of course is that just about every car manufacturer is making electric vehicles as indicated by their weightings in the funds. EKAR has weightings greater than 5% in Toyota (TM), Intel (INTC), Apple (AAPL), Alphabet (GOOG) and Nvidia (NVDA). The EKAR page doesn't have a sector breakdown but eyeballing it, it looks like 30-35% in companies from the auto group, 40-45% in tech and the rest in materials like lithium and cobalt names. The largest holdings in DRIV have 3% weightings and those names include Samsung, Intel (INTC), Microsoft (MSFT), Toyota (TM) and Apple (AAPL). The sector breakdown has 43% in tech, 40% in discretionary and industrials combined (automotive group) and the rest in materials.
Both funds are very heavy in mega cap tech which is a bit of a turn off only because those names are so prominent in broad market funds and broad tech sector funds. If you have an interest in the theme you need to look at all your other funds (if you use funds) and count up your exposure to these big names. It would be easy with a few funds to end up with a 10% weight in GOOG or MSFT which is only bad if you don't know you have that much. I for one don't want 10% in any one name, I think that is too much. I have some exposure to the theme for most clients through iShares Chile (ECH) which has a large weighting in SQM (SQM) which of course is a large lithium miner. To the extent mega cap tech stocks truly are part of the theme, then I have that exposure too.
Generally I am a fan of using thematic funds but not so sure I am a fan of this theme. Car companies have long been very difficult holds. One aspect of this that I think makes it more difficult is that with car quality going up, they can last a lot longer. When writing about retirement and cutting expenses I talk about being able to keep cars for very long time.