Electric Vehicles: Adding China to the US
Tesla is not the only player
Tesla shares have more than doubled this year, but the stock is perceived to be on a relatively high valuation. Some investors might want to play the electric vehicles theme in a more diversified way.
A new ETF from thematic ETF specialist Defiance, EVXX, offers equal weighted exposure to the five largest US-listed EV makers. As of June 2023, they were two US companies: Tesla and Rivian Automotive, and three Chinese ones: Li Auto, NIO and XPeng. This makes sense when China makes up 60% of global EV sales, and one in four cars sold in China are EVs.
The basket is rebalanced quarterly, which means it will be reducing exposure to the outperformers and adding to the underperformers. That is the opposite of most equity indices, which are market cap weighted so that outperformers become larger.
There has been wide dispersion in share price performance of EV makers. In 2023, Tesla stands out as a clear winner, up nearly 140%, followed by Li Auto is up about 50%, but Rivian and Nio are down on the year while XPeng is roughly flat. If this pattern continues over the quarter, the ETF would be selling down Tesla to buy Rivian and NIO.
This ETF is based on the Solactive Pure US Electric Vehicle Index, which requires companies to be classed as “Alternative Energy Car Manufacturers” in the FactSet Revere Business Industry Classification System.
This means that it will not have exposure to firms such as Volkswagen, BMW or Toyota, which are still viewed as conventional auto makers even though they have growing sales of EVs, and have ambitious targets. Volvo plans to become fully EV by 2030, Ford will do so for Europe, and Mercedes newly launched vehicles will be fully electric from 2025. These more diversified carmakers may trade on lower valuations than pure play EV makers.
In addition to EV carmakers, there are many other ways to play the EV theme through ETFs. Some of them bundle EVs with self driving/autonomous driving technology. Others add in supply chains, or focus exclusively on them and some home in on charging infrastructure.
EVXX could have some exposure to autonomous driving via Tesla, but it does not have exposure to EV supply chains, which are captured by lithium and battery themed ETFs as well as semiconductor chips geared to EVs.
EVXX’s expense ratio of 0.68% is at the high end of the range for EV themed ETFs, which go from about 0.40% to 0.72%.