DRIV: A Less Volatile Way To Get Electric Vehicle Exposure
Summary
- It is becoming clear that electric vehicles are here to stay.
- However, EV companies are very volatile and don't suit everyone.
- I believe that DRIV is an ETF that gives great exposure with limited volatility.
Introduction
One of the hottest trends in Wall Street the past several years is electric vehicles. This is not a coincidence, as this investing trend follows a real economic shift toward electric vehicles, which is happening before our eyes. We see more and more electric cars, and this is a global trend. We see it in China and Europe as well as the United States. The governments are welcoming the change, and it is here to stay.
Dividend growth investors usually don't find many electric vehicle companies that fit their portfolios. It is a new and disruptive technology, that still requires massive investment, and companies in the business either make very little money or still losing money on an annual basis, as they're investing heavily into their products. I find it very unlikely that any leading electric car company will pay dividends in the coming decade.
However, if you look for exposure to the sector, and want to look beyond the flashy names like Tesla (TSLA), and Nio (NIO), many companies pay dividends or at least grow their free cash flow in the form that allows them to pay dividends if they wanted. These companies are safer investments, and they will capitalize as well from the rise of electric cars.
The Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV) is a good investment tool for those who are interested in a diversified exposure to the entire sector. You will get the exposure that is not limited to the car manufactures but to the entire value chain from the materials, to the car and its software. This is an ETF with dozens of stocks, many of them have other interests besides EV alone, and therefore it is less volatile.
Electric Vehicles
According to ev-volumes.com, we see very strong growth in the number of electric cars worldwide. China is the largest market, and in 2020 Germany has become the second-largest EV market. The annual growth rate in the last decade has caused the market share to increase from 0.2% of sales less than a decade ago to 4.2% in 2020.
(Source: EV-volumes.com)
The growth is projected to continue quickly when some analysts like Ark Invest are extremely bullish on the sector, and their forecast implies that the growth rate will even accelerate. However, it must be noted that in 2017, their forecast said that by 2022 17 million electric vehicles will be sold annually, and we are still far from that number. Yet, even if the growth rate will stay in-line with the previous growth rate, we are still expected to see a growing market here.
The second trend that will come together with electric vehicles is autonomous driving. The companies in DRIV are also investing in autonomous driving technologies and some of them already have a product in development. The combination of electric cars together with autonomous driving will be the great disruptor of the transportation sector.
The most famous ETF that invests in the electric vehicles and autonomous vehicles businesses is ARK Autonomous Technology & Robotics ETF (ARKQ). I own this ETF, but it is a very aggressive investment, that comes with some more potential reward, but higher risk. I think that for many investors a less volatile ETF that gives a diversified exposure to the sector will suit well in their portfolio, and DRIV will do just that.
The challenges of investing in EV stocks
The major challenge of investing in individual stocks in the EV market is the massive volatility. Take NIO for example, one of the most promising EV companies. In the last year alone, its share price is up over 900%. Yet on Tuesday, investors in the stock suffered a 13% plunge. Of course, long-term investors will be mostly indifferent, but the volatility stocks like Nio are not for everyone.
Tesla is a similar case. In the last month, the stock price of this electric vehicle giant has plunged by over 20%. Every challenge or hurdle can shake the stock price, just as every good report can send it to the moon. Therefore, the volatility is here to stay, and investing in companies that can lose 20% in a month is challenging for many investors.
On the other hand, during the same time, the price of DRIV has stayed stable, as the ETF is holding a broad number of shares in the business, and is far from being focused on NIO and Tesla, which account for only 4% of the ETF.
DRIV is a good investment
The most crucial element for me here is the volatility. Most investors are not comfortable with volatility, and we saw it as many sold their stocks during the latest bear market in March 2020. As volatility and risk are an important element, a less volatile ETF like DRIV can offer investors a decent exposure with less risk. It is almost impossible to get additional returns without additional risk, and DRIV offers a good balance.
DRIV offers less volatility, but its returns are also lower when compared to Tesla and NIO. However, they are far from being disappointing. Since the ETF's inception almost three years ago, it has delivered to shareholders a compound annual growth rate of 23.76%.
Also, the ETF is a very comprehensive collection of companies. Some of these companies like Toyota (TM) and Nvidia (NVDA) have a very wide array of revenue streams besides electric vehicles and autonomous driving. It gives investors a more encompassing portfolio that covers the EV business with more stability. Besides, it also covers the entire value chain and offers a diversified sector breakdown as well as country breakdown.
(Source: Global X: Beyond Ordinary ETFs®)
Top Positions
Of course, car manufactures like Toyota, Tesla, NIO, General Motors (GM), and Ford (F) are a significant portion of the ETF, but they are not in the top positions. The top positions are actually semiconductor companies and software companies that build the basis for the hardware and the software that will be an integrated part of the future autonomous electric car. All three largest positions have impressive plans in these fields, but none will jump out when you think of EV or autonomous driving.
The largest company in the ETF is Intel (INTC). Intel, after acquiring Mobileye for $15.3 billion, has become a player in the autonomous driving field. According to Bloomberg, it is planning self-driving cars to the masses by 2025 using Mobileye technology.
The second-largest position is Alphabet (GOOG) (GOOGL), which owns Waymo, Alphabet's self-driving project. It is planning to build Waymo as a self-driving taxi service, and it even has a pilot called Waymo One that already operates in Arizona. When you think of Alphabet, you don't think of Waymo, but this is a great way to achieve exposure.
The third-largest position is Microsoft (MSFT) as the company is collaborating with General Motors and Cruise on their own self-driving car initiative. When you invest in Microsoft, you invest mostly in its well-known software business, but the company is now investing in autonomous vehicle projects, and it is leading a $2 billion investment round in the joint venture with GM.
Conclusion
Investors who want exposure to the electric vehicles and autonomous driving business can do it by investing in some leading companies like Tesla and NIO. Their potential reward is massive, yet the risks are also very high. They can also invest in an ETF like ARKQ, which focuses on these disruptive technologies, but its top 10 positions account for 50% of the ETF, thus the risk is still high.
The third option, which I believe suits most investors, is investing through an ETF that is diversified across the value chain and geographically. I believe that DRIV is a good ETF for that purpose. It is still more volatile than the broad market, but it also invests in a wide array of companies while achieving high returns.
Analyst’s Disclosure: I am/we are long ARKQ, GOOG, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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