AAPL - DRIV: An Uninspiring Outlook Ahead

Summary

• DRIV is a highly diversified autonomous vehicle and EV ETF. It is on my watchlist as leading indicators are not printing a favorable outlook currently.
• Leading consumer sentiment indicators suggest a slowdown in spending ahead.
• Leading automotive indicators indicate slowness in production and a prolonged supply chain reset.
• Continued slowness in demand expected for semiconductors.
• Technical analysis also suggests limited upside for DRIV, especially on an absolute basis.

Introduction

The Global X Autonomous & Electric Vehicles ETF ( DRIV ) provides one of the broadest cross-value chain exposures to new-age automotives I've seen, with a focus on B2C business drivers. This is in stark contrast to the KraneShares Electric Vehicles and Future Mobility Index ETF ( KARS ), even though that too gives broad exposure to the EV value chain albeit with a focus on B2B drivers. The broad discrepancy prompted me to evaluate DRIV as I look to rotate out of KARS, which has hit my target of $33.69 , generating +1.62% alpha in 2 weeks.

Tepid leading consumer sentiment, auto production and demand and semiconductor industry outlook lead me to have a neutral bias on DRIV currently.

DRIV Exposure Mix

Industry Mix

For an autonomous and electric vehicles ETF, it is unsurprising to see 56.2% of its exposure in motor vehicles, semiconductors, OEM auto parts and electrical products. I am, however, surprised about exposure to the long-tail of other industries. This indicates to me that DRIV has strong cross-sectional exposure across the autonomous and EV value chain. Thus, I consider DRIV to be rather well diversified given its focused theme, improving the ETF's utility.

Geography Mix

70.8% of total exposure is concentrated in countries such as the United States, Japan, and Germany that are known for having leading automotive OEMs. Australia comes up in 4th place, likely to due to its position as the global leader in lithium production, with more than 50% production share. Lithium is a core ingredient in electric vehicle (EV) batteries.

Top 5 Holdings

The top 5 holdings include Tesla ( TSLA ), NVIDIA ( NVDA ), Apple ( AAPL ), Alphabet ( GOOG ) ( GOOGL ), and Qualcomm ( QCOM )

DRIV's top 5 holdings make up only 16.8% of the overall ETF, which again shows a high degree of diversification. Note that most of the companies in the top 5 are B2C businesses, making consumer sentiment a key driver of future performance.

Thesis

I form a cautious view that warrants watching DRIV from the sidelines for now, after analyzing the status of key high-frequency leading indicators:

Leading consumer sentiment indicators indicate a slowdown in spending ahead

The University of Michigan Consumer Sentiment Index is considered a leading indicator of consumer sentiment. In December, this printed 59.7, marking decadal lows. This indicates a slow spending outlook among US consumers, which includes fewer car purchases and fewer gadget purchases, thus curbing growth prospects of large companies such as Tesla, Apple, and Google. Qualitative commentary confirms this view and gives more color:

About 60% of consumers have already scaled back their spending in response to inflation, and even more consumers plan spending cuts in the year [2023] ahead.

- Five Patterns in Consumer Responses to Inflation Report , University of Michigan

Thus, this leads me to have a more cautious medium-term outlook on overall consumer spending. I acknowledge that this is quite a generalized assessment, which may miss certain nuances. For this reason, I dig into vertical-specific demand drivers too:

Leading automotive indicators suggest slowness in production and possible prolonged supply chain reset

High demand and semiconductor supply-side shortages have led to a precipitous fall in domestic auto inventory levels since the pandemic in March 2020. In 2022, this has bottomed out, and inventory levels have been rising. However, the manner in which it is rising matters: Are auto OEMs manufacturing more than what is demanded, leading to an inventory increase? Or is inventory increasing due to tepid demand?

The data reveals that US car production in 2022 has only marginally increased. The more recent trend is a fall from July 2022 to December 2022. Given falling manufacturing PMIs for 5 consecutive months and contracting manufacturing PMIs for the last 3, this is unsurprising:

DRIV has 10.3% exposure to Japan via automotive OEMs. Here too, the manufacturing PMIs show contraction with a print below 50 :

Germany is also known for its auto-manufacturing sector and has a 5.7% weight in DRIV. The story here in terms of manufacturing PMIs is no different; contraction again as January 2023 prints 47.3:

Whilst January 2023 did see a jump in US domestic motor vehicle sales, this is still below 2021 levels when the supply-chain issues in the automotive sector began:

Commentary from industry experts such as Richard Barnett, chief marketing officer with Supplyframe also indicates a "generally pessimistic outlook for the auto industry extending well into 2023".

Continued slowness in demand expected for semiconductors

Commentary from the largest semiconductor foundry in the world - Taiwan Semiconductor Manufacturing Company Limited ( TSM ) indicates weakness in the sector driven by consumer slowness in demand until H2 of 2023. The first half of 2023 is expected to see a sales decline of 5-9% YoY, with most of the decline coming in the first calendar quarter. As semiconductors have the second-highest weight in DRIV at 16.4%, I believe this is another headwind weighing down the prospects of DRIV over the next few months and quarters.

Technical Analysis

If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post , which explains how and why I read the charts the way I do, utilizing principles of Flow, Location, and Trap.

Relative Read of DRIV vs SPX500

In the relative chart of DRIV vs the S&P 500 ( SPY ) ( SPX ), the ratio price has reacted off a key support area and has importantly printed a false breakout to the downside, triggering the buys. However, as it is reacting off the monthly resistance currently, I anticipate a small pullback first before any chances of a bullish resumption.

Standalone Read of DRIV

On the absolute DRIV chart, prices are reacting at the monthly resistance at $24.84. I identify the key support area to be a bit lower at $18.04. Hence, I anticipate another leg down toward monthly support.

Positioning

Overall, I like the very diversified nature of the DRIV ETF and its broad exposure across multiple sectors. However, this very characteristic makes me more cautious in the medium term, holding me back from the buys currently. The reason for this is subdued bullish momentum in leading indicators associated with consumer sentiment, automotive production and sales, and ongoing slowdown in the semiconductors market. The technicals also suggest caution, especially on an absolute basis.

Thus, I maintain this on my watchlist as I maintain a 'hold'.

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