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IDRV ETF: a smarter way to invest in TSLA stock

By September 6, 2020 No Comments

Few stocks have generated the buzz that Tesla stock has this year. As believers in a passive indexing approach to investing we tend to refrain from stock picking. This doesn’t mean we ignore stocks like TSLA, it just means we’d rather own them as a part of a broader index. Sure enough, TSLA is already a top 10 holding in large-cap growth index ETFs like IWF and SCHG. For those seeking even more exposure to TSLA stock, consider the IDRV ETF from iShares.

Why not just buy TSLA?

If you want to own TSLA stock, why wouldn’t you just buy the stock outright? Well, for starters you’d be taking on a lot of volatility. TSLA has fallen 50% from its high in each of the last two years. Furthermore, TSLA was essentially dead money for a 5-year stretch from 2014-2019, with three declines of 35% or more during the period:

TSLA stock experiences more ups and downs than the IDRV ETF

The S&P 500 rose from about 1,800 to roughly 2,800 from the beginning of 2014-mid 2019, during TSLA’s dead money period. That’s a return of 55%. Granted, TSLA shareholders who bought prior to 2014 or after 2020 have done very well, but that’s not great odds for those considering buying TSLA at current prices. In fact, that rough stretch from 2014-2019 occurred right after TSLA stock had rocketed higher during the preceding year. That’s a similar backdrop to today as TSLA is up nearly 1000% over the last year.

Basically, we want lower volatility and smoother returns. Buying into a stock like TSLA would sacrifice each of those for the sake of speculating on further momentum in a single stock. That’s not what we believe in.

IDRV ETF: a smarter way to buy TSLA

That’s where we introduce the IDRV ETF, which is a passive index ETF that aims to track the NYSE FactSet Global Autonomous Driving and Electric Vehicle Index™. This index tracks the performance of stocks that are involved in the development of Autonomous Driving and Electric Vehicles. This is a growth style index and should be used along side existing large-cap growth allocations.

What we like most about the IDRV ETF is that it is a passively managed ETF. This is important to us as recent research continues to show that actively managed funds consistently underperform their market benchmarks. The index IDRV tracks is reconstituted annually and the fund itself is rebalanced twice per year, in June and December. This passive nature gives us assurance that if the index is performing well, so too will our investment in IDRV.

Based on the rules of the index IDRV follows, TSLA is likely to remain a top weighted constituent in the index for the foreseeable future. This compares to an actively managed ETF that might have TSLA as a top holding today, but can sell it tomorrow, leaving you scrambling for a new way to invest in the stock.

IDRV follows a rules based system

One of the rules in the index IDRV’s tracks is that no company shall exceed a 4% weight in the index. This reduces concentration risk in the index and should help to lower volatility in the IDRV ETF itself. However, one should note that because the index is only rebalanced twice per year, a holding could exceed 4% between rebalance periods. For example, if $1000 each is invested into 25 stocks today, each stock would make up 4% of a $25,000 portfolio ($1,000 divided by $25,000 equals 4%).

Six months from now, one of the 25 stocks may have risen 50% while the other 24 stocks remained flat. The effect is that the one stock that rose is now worth $1,500, or nearly 6% of the portfolio ($1,500 divided by $25,500 equals 5.88%). This is important to understand because TSLA currently makes up 8% of the IDRV ETF portfolio¹. This is because in the time since the index rebalanced in late June, TSLA has risen more than 100%.

The IDRV ETF is next scheduled to rebalance in late December. At that time, IDRV will sell a necessary amount of TSLA shares that it owns to bring the allocation back to no more than 4%, in line with the index’s rules. Why does this matter? First, it means that IDRV has a disciplined, rules-based, system in place for taking profits on winning positions. Secondly, the 4% cap will limit any concentration risk in one individual stock. If TSLA were to fall 50%, which it has twice in the last two years, the impact on IDRV would be -2% (-200 bps).

What else is in IDRV?

Though the IDRV ETF does track a niche index, many of the largest holdings are diversified away from the auto sector. Here’s a list of IDRV’s top 10 holdings:

Nvidia sells chips and graphic cards to the largest tech companies in the world, including to Microsoft, Amazon, and Facebook. Apple, well, it’s Apple. And then of course there are traditional automakers like Toyota. The point is is that while TSLA may be trailblazing a path of its own in the industry, there are already large players who will certainly be involved in some capacity. Google, for instance, earns 70% of its sales from ad revenue, but their self-driving unit, Waymo, is a huge player in the autonomous vehicle space.

One of the benefits of this broader type of portfolio inclusion is that IDRV ends up owning stocks that might be thought of as “value stocks.” Siemens AG, for instance, boasts a 3% dividend yield. Other holdings inside IDRV with healthy and reliable dividends include Qualcomm (QCOM), Toyota (TM), and Johnson Controls (JCI). These types of stocks help contribute to IDRV’s 1.25% dividend yield. The IDRV ETF boasts a significantly higher yield than QQQ  (0.55%) and the 10-year Treasury bond (0.72%)

Index investing beats stock picking

Anytime a hot stock catches the headlines the way TSLA has, it’s inevitable that we field questions on it. We try to remind investors of a number of different factors when the conversation turns to an individual stock:

  • You probably already own it through an index fund. A stock like TSLA is already a top 15 holding in passive ETFs like IWF, SCHG, and VONG.
  • If the stock price just went up 1000% you might be a little late to the party.
  • Do you really want to own the stock or do you just want to be able to say you own the stock? Think about it, it’s an honest question; don’t let ego shape investment decisions.

And last, but certainly not least, we turn to the data: index investing beats stock picking nine times out of ten. You might pick the best stock in the market one year, but that says nothing about your ability to do it year after year. At the end of the day successful investing is about giving yourself the highest odds of the highest return over time.

If, after all of this, you’re still convinced you need to own TSLA stock, consider investing in the IDRV ETF. This will increase your exposure to TSLA stock without adding unnecessary risks to your overall portfolio. If Tesla is successful in their trailblazing path, then IDRV will likely be a profitable investment for years to come. But if Tesla sputters, IDRV is still backed by the prospects of many other more diversified companies.

¹ View daily IDRV ETF portfolio holding weights

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