Tesla (TSLA) has been one of the most widely discussed individual stocks in the market over the last year. Last September, we wrote that we preferred the ETF, IDRV, instead of investing directly in TSLA itself. IDRV is a self-driving and EV tech ETF. Along with TSLA, IDRV holds positions in General Motors (GM), Ford (F), Google (GOOGL), Apple (AAPL), and other well known companies. The idea behind the ETF is that it gains exposure to a broad list of companies that stand to benefit from growth in the entire self-driving and EV tech space.
We are believers in the long-term theme of self-driving and electric vehicles. However, we think it could be hard to identify the exact winners of the trend, which is why we’d prefer to own a basket of stocks with broad exposure to the industry. By investing this way, we are aiming for steady returns with lower volatility than trying to pick winners. For example, Tesla may very well outperform the IDRV ETF, but it’s likely to experience much greater volatility along the way too. Let’s look at the performance of TSLA versus IDRV since we wrote our article on September 6th:
They are basically even, but TSLA, at one point up 100%, has since fallen 35% from its high. IDRV is only 4% below its highs. Sure if you had the skill or luck, (or both), to sell TSLA near the high you did great, but as passive, mainly buy and hold investors ourselves, IDRV has served a much better purpose. It has provided excess returns versus the S&P 500 (+39% vs +22.50%) with significantly lower volatility than TSLA.
If you had to guess… which stock would you say has been the better performer in 2021: Tesla or General Motors? It’s not even close… GM is up 36% in 2021 while TSLA is down more than 17%. That’s more then a 50% performance difference in favor of GM.
Therein lies the main benefits of a blended ETF: while some holdings go down, others (hopefully) rise, balancing out any losses. This results in smoother return profile for the ETF versus any of the individual stocks. While owning TSLA last year and then selling it to buy GM at the start of this year would have been the optimal decision, we live in a world where perfect execution is extremely rare and difficult to pull off. ETFs like IDRV solve this problem for us, thus eliminating the need to be strive for unrealistic perfection. We have no idea if TSLA or GM will be a better stock to own going forward, nor do we care.
Betting on secular trends versus stocks
When you invest in an individual stock you’re making a bet on the prospects of a specific business. When you invest in a passive ETF like IDRV, you’re betting on the prospects of a secular trend. There is clear evidence that electric vehicles are the automobiles of the future. And while it may be easy to say that Tesla is the leader in the field right now, that hasn’t stopped its stock from falling 35% so far in 2021. Meanwhile, GM and Ford haven’t sold a single electric vehicle and are undeniably behind in the EV race. Yet their stocks have done fabulously well in 2021.
We could spend hours debating the reasons behind the performance for each of these stocks. However, that would stray from our underlying point: thematic ETFs like IDRV provide a lower risk way to gain exposure to promising and exciting new technologies. Instead of staking your portfolio’s performance to the prospect of a single stock, such as TSLA, you can instead bet on the success of an entire industry. You may not a hit home run, but you’re also far less likely to strike out.