Two ways to invest in EVS

New technologies hold a lot of promise because of their ability to create newer and better products and services and cheaper ways of doing things.

The challenge for investors is capturing those advances and turning them into profits. Is it better to get in on the ground floor or wait for things to become clearer? Blackberry looked promising and the stock did well in the early going. Then Apple’s mass market iPhones swept it away.

Tesla (NDQ: TSLA) looked like a high wire act for a long time. But, if you’d stuck with it from the first day of its 2010 IPO, you’d be very wealthy today. A US$10,000 investment, adjusted for splits, would be worth more than US$1.58 million now.

A middle way to capture the upside of new technologies without tossing the dice is to go with today’s frontrunners. They have the most to lose if upstarts gain ground and so go all out to maintain their lead. These companies have proven businesses, the resources to experiment, and can recover from mistakes along the way.

Two years ago when electric vehicles and everything about them were top of the news cycle, I touched on these issues in an article that looked at two exchange traded funds (ETFs).    

The article argued that because of the rapidly developing technology, ETFs were a safer way to go than trying to pick a winner. They offered diversification through portfolios that offered a blend of established companies and startups. Some were carmakers and others produced components – such things as batteries, charging systems, smart software, and computer chips.

The article looked at two funds with different strategies. The main difference between them was one had a narrow focus on the emerging EV industry while the other had a broader technology mix. For a while the more focused fund did better as investors poured into the space, pumping up prices. Ultimately, the broader fund has proved to be the better bet.

The Evolve Automobile Innovation Index Fund (TSX: CARS) was launched in 2017. It holds 46 companies that derive most of their revenues from EVs and parts. This includes software, chips for infotainment and digital displays, power brake sensors, warning light indicators, and engine management. Others develop EV drive trains, autonomous driving systems. and network services.

Tesla was one holding, as was the promising Chinese startup Nio Inc. (NDQ: NIO). However, the top three holdings, worth 12% of the fund, were all semiconductor companies – Analog Devices Inc., SiTime Corp., and Ambarella Inc.

The fund did well in 2021, the year it was recommended. It was up 41.8% for the year at the time the article was written, and had $112 million in assets under management.  

The other fund was much larger. Global X Autonomous & Electric Vehicles ETF (NDQ: DRIV) had US$1.1 billion in assets. It was launched in 2018 and held 76 companies involved in the development of EVs and components. Involved is a key word. While Evolve was focused on the industry, GlobalX’s mandate was broader.  

It was also having a good year in 2021, though not as good as the Evolve ETF. It was up 14.6% for the year at the time of the recommendation.

There was some overlap with the Evolve portfolio, but its top 10 holdings, which accounted for 30% of the fund, were are all tech titans. Tesla was the biggest holding (4%) followed by Alphabet (3%), Nvidia (4%) and Microsoft (3%). The latter three are mainly in other businesses but have a product or service that the auto industry uses.

Two years later the assets of both ETFs have shrunk as the EV honeymoon has worn off, competition has stiffened, and a rapid rise in interest rates weighed on sentiment. The GlobalX ETF has US$692 million in assets at time of writing. That’s 40% less than two years ago. Evolve has $35 million, about two-thirds less than in 2021.

The Evolve ETF is currently trading at $21.99. That is 60% below the level two years ago, though 10% above its $20 issue price in 2017. GlobalX investors have done better. That ETF was trading at US$23.37 this week, 33% below its 2021 price, but 53% higher than its issue price in 2018. Global X’s broader mandate and investments in Big Tech have acted as a buffer as conditions have changed.

Both funds have changed their top holdings. GlobalX’s top three are now Alphabet, Nvidia, and Intel. The Evolve ETF’s current top three are less well known. Alfen NV is involved in battery storage and EV charging stations and has performed poorly this year. Its shares are down 50% year to date. Second ranked Li Auto Inc. is a Chinese EV maker which has had a better year. Third ranked Microvision Inc. makes sensors used in automotive safety and autonomous driving applications and is not profitable.

Among the things that have changed is that buyers have become fickle. They are holding off their purchases as the industry evolves, waiting for such things as longer battery life and a better charging network. A recent Consumer Reports study found EVs are less reliable than gas powered vehicles.

So, what can an investor conclude from the performance of the two funds? One is that the narrower your investment focus, the greater your risk, especially with sectors that are rapidly evolving. This is true of all investment decisions.

Another is that the mega cap tech companies in the Global X fund have been a stabilizing force. They offer diversification, which is your friend.

You might add that you shouldn’t let fear of missing out – FOMO – make you impatient and jump too soon. It’s a long road to maturity and opportunities will emerge along the way.     

Finally, your odds of picking a home run are slim, but if you can do it by betting on a Tesla, you can supercharge your returns. It can be a winning strategy, but not one for the faint of heart.

This is an edited version of article that appeared in the Internet Wealth Builder on Dec. 11, 2023.  For information on how to reprint this article please view this page.