How to Invest in the EV Industry

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The electric car sector has been booming for the past few years and has grown into a global secular trend that has transformed the automotive market. Stocks like Tesla (NASDAQ:TSLA) have generated incredible returns for early investors, gaining over 2,400% over the past five years. With the electric vehicle (EV) industry still being in its relatively early stages, many are interested in investing in it.

If you're interested in this developing industry, it's important to understand the history of the auto industry and how we got here. Let's review how to invest in the EV industry, as well as the advantages and disadvantages of investing in the industry.

An Overview of the Auto Industry

Brief History of the Auto Industry

German inventor Karl Benz, the founder of Mercedes-Benz, created the first practical automobile powered by an internal combustion engine back in 1885. Ten years later, commercial production began in the United States. This led to a boom of automobile vehicles in the 1900s. Fast forward to today, the U.S. and Japan provide a bulk of global automotive manufacturing, but Europe and the rest of Asia are also key players in the automotive industry.

Development of Electric Vehicles

Electric vehicles actually existed prior to Karl Benz's creation of automobiles that use internal combustion engines. But they fell out of favor as gasoline engines improved. It wasn't until the 21st century that EVs gained significant traction due to improvements in technology and growing concerns about the impact on the environment from car emissions.

For the most part, modern EVs use no gasoline to run. They operate through a rechargeable battery. They typically have less maintenance than conventional motor vehicles. And they align with the global push to reduce emissions and reach eventual carbon neutrality.

How to Invest in the Electric Vehicle Industry

Environmental, Social and Governance (ESG) investing has been gaining traction in recent years. Due to this trend, investors are increasingly becoming attracted to industries that could change the world for the better. Electric vehicles fall into the clean energy category since rechargeable EV batteries look to move away from the fuel economy.

It's worth noting that despite the positives that electric vehicles bring, EV sales still account for only 3.6% of total automotive sales in the U.S. as of June 30, 2021 according to consulting firm McKinsey. So will Americans ever buy electric vehicles on a large scale? It's difficult to say with certainty, but the government is pushing for it. Some states, such as California, have pledged to reach 60% renewable energy by 2030. If people also accept electric vehicles and begin using them, such cars could become common in the future.

So how do investors participate in this industry? The easiest way to invest in the growth of the EV industry is probably through the stock market. We have in recent years seen many new electric vehicle makers go public. This makes for an ever-growing list of stocks to consider. Let's take a look at some of the more prominent electric car stocks to invest in today.

Read More: How to Get Started With ESG Investing

Top Electric Car Companies to Invest In

Tesla, Inc. (NASDAQ:TSLA)

Tesla is generally considered the industry leader. It has a market cap of more than $1 trillion (as of Dec. 31, 2021). The company is growing fast. It delivered 241,391 cars in the third quarter of 2021, a 79% increase year over year. Tesla's Model 3 is the best selling electric vehicle worldwide, known for its sleek design and high-end tech features such as semi-automated driving.

Cathie Wood, CEO of ARK Investments, believes that Tesla can grow further by being ahead in the automated driving space. Tesla's CEO Elon Musk is also a very prominent personality and can frequently be seen in the media.

Rivian (NASDAQ:RIVN)

Rivian is an electric truck and van maker that has significant investors. It went public in November 2021. Its largest customer and one of its largest investors is Amazon (NASDAQ:AMZN). It owns a 20% stake in the company and already has a standing order for over 100,000 electric delivery vans. Ford owns a 12% stake in the company. Rivian has a market cap of more than $90 billion (as of Dec. 31, 2021). But it has only $1 million of revenue as of Sept. 30, 2021.

Lucid Motors (NASDAQ:LCID)

A competitor to Tesla, Lucid went public via a SPAC merger with Churchill Capital in July 2021. Despite having a market cap of over $60 billion (as of Dec. 31, 2021), Lucid only delivered its first batch of 520 vehicles in October 2021. Its Lucid Air sedans are luxury vehicles with price tags north of $100,000 per car. This premium electric car won the 2022 MotorTrend Car of the Year Award.

Fisker Inc. (NYSE:FSR)

Fisker Inc. went public via a SPAC merger in October 2020. It has a market cap of over $4 billion (as of Dec. 31, 2021). Despite the company's being in operation since 2016, Fisker hasn't made its first delivery yet. Fisker's first electric vehicle, the Ocean SUV, is expected to be delivered in November 2022. The Ocean is said to be made from sustainable and recycled products. These include recycled plastics from the ocean and vegan leather for the interior.

Nikola Motors (NASDAQ:NKLA)

A controversial EV stock, Nikola went public through a SPAC merger in June 2020. The company has been under fire for its founder and former CEO Trevor Milton being accused of securities fraud. Milton ended up stepping down from his position. With a market cap of more than $4 billion (as of Dec. 31, 2021), Nikola just delivered its first pilot trucks in December 2021.

Electric Car ETFs

Another way to gain diversified exposure to EV stocks is through an electric vehicle ETF. An ETF, or exchange-traded fund, is an asset class that typically tracks a certain index. ETFs are very popular among passive investors who do not wish to trade individual stocks. There are many EV ETFs that investors can choose from, including:

  • Global X Funds — Global X Autonomous & Electric Vehicles ETF (DRIV) — This ETF aims to replicate the Solactive Autonomous & Electric Vehicles Index. This index tracks the electric vehicles and autonomous driving sector. Top holdings include Tesla, NVDIA and Qualcomm.
  • KraneShares Electric Vehicles and Future Mobility Index ETF (KARS) — This ETF aims to replicate the Bloomberg Electric Vehicle Index. This index tracks EV production and their components. Top holdings include Contemporary Amperex Technology Co Ltd (China based battery supplier), NIO Inc. and Tesla.
  • SPDR Series Trust — SPDR S&P Kensho Smart Mobility ETF (HAIL) — This ETF aims to replicate the performance of the Kensho Smart Transportation Index, an index that tracks smart transportation. Top holdings include Avis Budget Group, Tesla and XPeng Inc.

One advantage an ETF offers over an individual stock is that the investor does not have to choose a specific EV company. An ETF usually owns a variety of EV stocks. Owning a basket of EV stocks is a great way to gain exposure to the broader EV market.

Find out more: ETF Investment 101

Why Invest in the EV Sector?

The EV industry has a lot of potential, as can be clearly seen from the performance during the last few years of companies like Tesla. But as with any disruptive technology, it is still speculative. So investors should consider their personal risk tolerance before investing. Below are advantages and disadvantages to investing in the EV industry.

Advantages of the EV Sector

Electric vehicle adoption is growing rapidly around the world. In November 2021, electric vehicles accounted for 26% of new cars sold in Europe. And in China the EV market share jumped to 19% in October 2021.

The U.S. Government is in favor of electric vehicles. The Biden administration in August 2021 outlined its infrastructure plan. It targeted an electric vehicle sales share of 50% by 2030. And there are tax incentives for buying certain types of electric motors, further pushing for clean energy adoption in the country.

ESG momentum. As mentioned earlier, investors are becoming more focused on investing in environmentally friendly initiatives. Electric cars are part of the movement to adopt renewable energy and may benefit from ESG momentum.

Disadvantages of the EV Sector

Many EV stocks have high valuations. For example, companies like Lucid and Rivian have few sales but have high stock prices. A lot of upside may already be priced into certain EV stocks.

Many players in the space. The EV sector is still new and it is difficult to predict which electric car makers will come out on top. It's difficult to say whether all of the current EV carmakers will exist 10 to 20 years from now.

No guarantee of widespread adoption. Despite the increasing momentum, EVs still haven't replaced gasoline vehicles. On a global scale, electric vehicles still make up a small fraction of the overall market, and it's still possible that widespread EV adoption will fail.

Conclusion

With the acceleration of interest and growth for electric vehicles in the 21st century, investing in the industry certainly is alluring. But it's difficult to say whether the EV market will gain mainstream traction. After all, EV sales worldwide is still less than 10% of total car sales. But with the government pushing for adoption and interest in ESG investing growing, there is a real possibility for a shift in the future.

One of the most accessible ways to invest in the EV market is through the stock market. Investors have to decide whether to invest in individual companies or in an ETF to gain exposure to the broader industry.

Finally, while investing in disruptive and innovative industries is an exciting endeavor, investors should make sure that it aligns with their personal risk tolerance.

Disclaimer: The content presented is for informational purposes only and does not constitute financial, investment, tax, legal, or professional advice. If any securities were mentioned in the content, the author may hold positions in the mentioned securities. The content is provided ‘as is’ without any representations or warranties, express or implied.

Jay Wu, CFA®

Jay Wu, CFA®, has over a decade of finance experience spanning asset management, restructuring, and investment banking. He started Money Knock (https://moneyknock.com) to help readers navigate through the intricacies of various investment and personal finance related topics.

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