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Tesla Experiences a Steep Fall: ETFs in Focus

Zacks Equity Research
We have highlighted ETFs from the best and worst zones over the past week.

Tesla Inc TSLA shares fell sharply on Jan 18, after the company announced that it will cut around 7% of its workforce and predicted that fourth-quarter profits will be less sequentially. Shares plunged 13% -- marking the seventh-sharpest drop ever. This was also the biggest decline since September, when the SEC announced that it is suing Elon Musk.  

Tesla’s CEO, Elon Musk, said that the company’s cars are “too expensive for most people,” indicating the same as the primary reason for the job cuts. He added that the company needs to make these cuts alongside increasing the Model 3 production rate and making many manufacturing and engineering improvements in the coming months.

The plan is likely to get closer to making the $35,000 Model 3 car, which the company has been promising since it first unveiled the model in 2016. At present, the cheapest Model 3 available is the midrange rear-wheel-drive mode, starting at $44,000. More costly bets are the long-range, all-wheel-drive model starting at $51,000, and the performance model range which starts at $63,000.

The company supposedly added more workforce than needed last year, which is resulting in unnecessary administration expenses. Per Garrett Nelson, automotive analyst at CFRA Research, for most auto manufacturers, cost cutting is seen as a positive move. However, investors have started to second-guess whether demand is an issue when it comes to Tesla.

Federal Tax Credit Issue

The automaker would want to ramp up Model 3 production ahead of the scheduled reduction in U.S. tax credits, beginning Jul 1. Per Musk, the need for the lower-priced variants of Model 3 will be even more on Jul 1, when the U.S. tax credit again drops to half, making the car $1,875 more expensive, and then again at the end of the year when it goes away entirely.

The $7,500 federal tax credit for electric cars was reduced to half on Jan 1. In response to the enactment, Tesla reduced the prices on all its models by $2000. The price discount was announced alongside the quarterly delivery numbers for the fourth quarter, which fell short of analysts’ estimates (read: Auto Sales Surprisingly Up in 2018: ETF & Stocks to Buy).

What Lies Ahead?

Per Elon Musk, Tesla is likely to post a small fourth-quarter profit, given the accelerated shipments of higher-priced Model 3 variants to the European and Chinese markets. Tesla plans to start delivering Model 3 cars to customers in China in March and reportedly is close to getting approval to start deliveries to Europe.  The company is expected to announce earnings for fourth quarter on Feb 6.

ETFs in Focus

Shares of Tesla have been struggling, losing about 9.2% in the year-to-date time frame (as of Jan 18). Signs of easing global economic growth might act as headwind ahead.

Against this backdrop, we describe in detail, five ETFs providing the highest exposure to Tesla (see: all the technology ETFs here):

ARK Industrial Innovation ETF ARKQ—9.9% exposure

It is an actively managed ETF providing exposure to autonomous vehicles, energy storage, robotics and automation, 3D printing and space exploration. The fund comprises 36 holdings with Tesla occupying the second spot. It has AUM of $164 million and expense ratio is 0.75%. The ETF has been performing strongly over the past four weeks, returning 10.8% (as of Jan 18) (read: Tesla May Enter S&P 500 Index: ETFs to Watch).

First Trust NASDAQ Clean Edge Green Energy Index Fund QCLN—8.7% exposure

The fund tracks the NASDAQ Clean Edge Green Energy Index in which bigger companies receive a larger index weighting but places upper limits on stock holdings to prevent high concentration among larger alternative energy stocks. The fund comprises 39 holdings with Tesla occupying the first spot. AUM is $88.3 million and expense ratio is 0.60%. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.  The ETF has returned 10.9% in the past four weeks (as of Jan 18).

VanEck Vectors Global Alternative Energy ETF GEX—8.4% exposure

The fund follows the Ardour Global Index which tracks the performance of companies involved in the business of alternative energy, including power derived principally from bio-fuels, bio mass, wind, solar, hydro and geothermal sources. It also includes various technologies that support production, use and storage of these sources. It comprises 30 holdings with Tesla occupying the fifth spot. AUM is $84.5 million and expense ratio is 0.63%. It has returned 10.3% in the past four weeks (as of Jan 18).

ARK Innovation ETF ARKK — 8.1% exposure

This is an actively managed ETF which includes companies that rely and benefit from innovations taking place in a wide variety of sectors. It comprises 36 holdings with Tesla Inc occupying the top spot. The fund’s AUM is $1.3 billion and expense ratio is 0.75%. It has returned 19.4% in the past four weeks (as of Jan 18) (read: 5 Rising Technology ETFs in 2019).

Global X Lithium ETF LIT—5.5% exposure

The fund tracks the Solactive Global Lithium Index which tracks the performance of the largest and most liquid listed companies that are active in the exploration and mining of Lithium or production of Lithium batteries. It comprises 40 holdings with Tesla Inc occupying the fifth spot. The fund’s AUM is $607.6 million and expense ratio is 0.75%. It has returned 7.7% in the past four weeks (as of Jan 18).

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First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN): ETF Research Reports
 
Global X Lithium & Battery Tech ETF (LIT): ETF Research Reports
 
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