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Should You Buy the Dip in Tesla With These ETFs?

Tesla Motors TSLA has been witnessing wild trading this week amid a host of negative news. The stock tumbled 12% on Nov 9, extending the losses for the second day after its shares plunged 5% on Nov 8. The back-to-back decline after September 2020 has eroded about $199 billion in value from the electric car maker.

The sharp sell-off came on the heels of CEO Elon Musk’s Twitter poll that asked voters over the weekend if he should sell 10% of his stake in the electric-vehicle company. The poll was followed by news of his brother Kimbal selling some shares just before the poll. There was also a Business Insider report on Michael Burry, the investor made famous by “The Big Short” movie, saying Musk may want to sell stocks to cover his personal debts.

Many analysts view the action as part of a normal and healthy pullback given that Tesla has been in an overbought territory. Nvidia’s (NVDA) push into self-driving cars added to the chaos as the EV maker’s edge over competitors in autonomous driving technology is often cited as a big reason behind its premium multiple.

ETF Impact

The dismal trading has also been felt in the ETFs having the largest allocation to this luxury carmaker. Simplify Volt Robocar Disruption and Tech ETF VCAR stole the show, plunging 8.2% in the Nov 9 trading session. ARK Industrial Innovation ETF ARKQ and ARK Innovation ETF ARKK declined more than 2% while Consumer Discretionary Select Sector SPDR Fund XLY and MicroSectors FANG+ ETN FNGS dropped about 1.8%.

Below we have profiled them in details:

VCAR

This is an actively managed ETF seeking concentrated exposure to the leader of the autonomous driving technology and enhancing the concentrated exposure with options. It is heavily exposed to the Tesla stock and Tesla call options at 25% share. The fund seeks to boost its performance during extreme moves in Tesla, charging investors 0.95% in annual fees. It has accumulated $7.3 million in its asset base while trades in an average daily volume of 13,000 shares (read: Chip Crunch Hit US Auto Sales in Q3: ETFs, Stocks in Focus).

ARKQ

This is an actively managed ETF seeking long-term capital appreciation by investing in companies that benefit from the development of new products or services as well as technological improvement and advancements in scientific research related to energy, automation and manufacturing, materials and transportation. This approach results in a basket of 37 stocks, with TSLA occupying the top spot with an 10.9% share. The product has accumulated $2.7 billion in its asset base and charges 75 bps in fees per year. It trades in volume of 274,000 shares a day on average.

ARKK

This is an actively managed fund investing in companies that benefit from the development of new products or services, technological improvements and advancements in scientific research. In total, the fund holds 45 securities in its basket with Tesla occupying the top position, accounting for a 9.7% share. The product has gathered $21.2 billion in its asset base and charges 75 bps in fees per year from investors. It trades in a volume of 5.4 million shares per day on average.

XLY

This product offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. It is the largest and most-popular product in this space, with AUM of $23.9 billion and an average daily volume of around 5.2 million shares. Holding 63 securities in its basket, Tesla takes the top spot with 20.5% of assets. The fund charges 12 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Consumer Discretionary ETFs to Gain as COVID-19 Situation Improves).

FNGS

This ETN is linked to the performance of the NYSE FANG+ Index, which is an equal-dollar weighted index, designed to provide exposure to a group of highly traded growth stocks of next-generation technology and tech-enabled companies. It holds 10 equal-weighted stocks in its basket, with Tesla accounting for 10% share. The product has accumulated $83.2 million in its asset base and charges 58 bps in annual fees. It trades in an average daily volume of 25,000 shares and has a Zacks ETF Rank #3.

What Lies Ahead?

Despite the latest decline, Tesla is up 45% so far this year and continues to hold its trillion-dollar market capitalization, a key level hit in late October. It is still outperforming some vehicle manufacturers and has more than doubled over a one-year period (read: 6 ETFs to Ride on Tesla's Trillion-Dollar Market Cap).

The rally came on the back of strong Q3 earnings and delivery numbers. Tesla posted record Q3 revenues and one of the strongest profit margins in the group's history. It also delivered record vehicles in the last quarter, underscoring its strong growth amid the global automotive semiconductor shortage that is roiling car production across the globe. The company's Model 3 has become the first electric vehicle to top monthly sales of new cars in Europe, beating stalwarts like the Renault Clio and Volkswagen Golf.

That said, the outlook for the electric vehicle maker remains solid. The stock also saw a solid earnings estimate revision of 59 cents over the past 30 days for this year with estimated growth of 163.8%. Tesla currently has a Zacks Rank #1 (Strong Buy) and a Growth Score of A, underscoring that it is primed for more growth.

However, Tesla is still overvalued after the latest slide. It has P/E ratio of 196.74 compared to the industry average of 19.83, which suggests that the stock might continue to see rough trading ahead, thereby making the ETFs unattractive. But investors should note that the ETFs provide spread out exposure to a number of firms, suggesting that these can easily counter shocks from some of the industry’s biggest components.


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Tesla, Inc. (TSLA): Free Stock Analysis Report
 
Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
 
ARK Autonomous Technology & Robotics ETF (ARKQ): ETF Research Reports
 
ARK Innovation ETF (ARKK): ETF Research Reports
 
MicroSectors FANG ETN (FNGS): ETF Research Reports
 
Simplify Volt Robocar Disruption and Tech ETF (VCAR): ETF Research Reports
 
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