DRIV - DRIV Dive: At The Trading Range Midpoint This ETF Could Offer Value

2023-11-07 12:42:14 ET

Summary

• Car dealers sold a record high of approximately 295,000 electric vehicles in the US from April to June 2023.
• The Global X Autonomous & Electric Vehicles ETF experienced a peak in demand for EVs in late 2021 but has since seen a bearish trend.
• Geopolitical threats and affordability issues have overshadowed climate change as the leading concerns in the EV industry.

In August 2023, CNN reported that car dealers had sold roughly 295,000 electric vehicles ("EVs") from April through June, a record high.

The chart highlights the impressive trend in U.S. EV purchases. The Inflation Reduction Act drove sales higher, with tax credits of up to $7,500 on EV purchases. However, the average EV is more expensive than the average gas-powered car. Compounding the cost factor is the lack of charging stations that support more widespread adoption of electric vehicles.

The price action in the Global X Autonomous & Electric Vehicles ETF ( DRIV ) tells us the demand for EVs peaked in late 2021. The U.S. economy and worldwide threats have weighed on the ETF's components, sending DRIV lower to a level that could offer value as a contrarian investment.

Climate change initiatives and TSLA's success drove DRIV higher from March 2020 through November 2021

Tesla, Inc. ( TSLA ) is the bellwether company in the EV industry.

The chart shows the dramatic 1674% rally from $23.37 in March 2020, when the global pandemic gripped markets across all asset classes, to the $414.50 record peak in November 2021.

Tesla is one of the top holdings of the Global X Autonomous & Electric Vehicles ETF product.

As the chart shows, DRIV allocates nearly 3% of its over $682 million in assets under management to TSLA shares.

The chart shows DRIV rallied over 247% from $9.32 per share in March 2020 to $32.37 in November 2021.

The trend turned bearish in late 2021 - Lower highs over the past two years

DRIV's trend ran out of bullish steam after peaking in late 2021.

The chart illustrates the 41.6% correction from the November 2021 $32.37 high to $18.91 in October 2022. After recovering to $27.80 in August 2022, DRIV fell and was just over the $22 per share level on November 7. The ETF was just above the midpoint from the March 2020 low to the November 2021 high. The trend has been bearish since the late 2021 peak, and DRIV has made lower highs and lower lows since July 2023.

Geopolitics have trumped climate change as the leading "existential" threat

The Biden administration has repeatedly called climate change the primary "existential" threat facing the U.S. and the world. Energy policy has supported the EV industry on the federal level, and many states have followed the administration's lead.

Meanwhile, the war in Ukraine beginning in early 2022 and continuing in late 2023 and the war in Israel that broke out after the October 7 terrorist attack have put climate change on the sidelines. The bifurcation of the world's nuclear powers, the potential of another conflict over Taiwan, and the elevated threat of a global war have changed the "existential threat" calculus.

The bottom line is global tensions and conflicts have trumped climate change as the leading issues facing the Biden administration and worldwide leaders. Geopolitical threats have become a clear and present danger. Meanwhile, the world's most populous countries, China and India, have not signed on to climate change initiatives. With over one-third of the world's population, addressing climate change cannot succeed without Chinese and Indian cooperation.

EV demand has declined - Affordability is a problem

Higher interest rates have weighed on the U.S. and worldwide economies. The U.S. Federal Reserve increased the short-term Fed Funds Rate from zero percent to 5.375% since March 2022 to address inflationary pressures. While the central bank paused rate hikes at the last two FOMC meetings, the medium and long-term bond market has taken over, with 30-year Treasury yields rising to the highest level since 2007 in October. The ten-year Treasury bond recently rose above the 5% level. While 30-year conventional fixed-rate mortgages have increased from under 3% in late 2021 to over 8%, other consumer loan rates have skyrocketed. Car financing has become prohibitive, and demand for EVs and other automobiles has declined. Tesla CEO Elon Musk recently said that marketing is not helping, " Informing people of a car that is great, but if they cannot afford it, it doesn't really help ."

General Motors Company (GM) and Ford Motor Company (F) have delayed plans for EV investments, and Musk may put off plans for a new $1 billion plant in Mexico because of slack demand for EVs. The bottom line is EVs are a lot more expensive than their gasoline-powered counterparts. A Ford F-150 Lightning EV starts at the $50,000 level before the $7,500 tax credit, while the gasoline-powered model is under $37,000. General Motors Chevrolet Blazer begins around the $37,000 level, while the electric version is over $56,000 before tax credits. Batteries powering EVs are far more expensive than internal combustion engines. Economic woes are causing consumers to back off from buying EVs, and as the demand falls, the investments will decrease.

Moreover, car loans have become prohibitive. As the highest rates in years have limited the number of new home buyers, they have also crushed the market for new car buyers. Those needing new automobiles have become price-sensitive, and EVs are not the economical choice.

DRIV is a contrarian investment, but the ETF has become a lot more affordable - Higher oil prices could drive EV demand

DRIV is an ETF that holds shares of the companies on the cutting edge of technological advances in the automobile industry. The fund summary states:

The ETF holds shares of the leading car manufacturers. Still, it also owns the pick-and-shovel companies that supply the technologies necessary to combat climate change and foster autonomous vehicles.

Several factors that could cause the bearish trend to end, supporting DRIV over the coming months and years:

• An easing of geopolitical tensions could shift attention from conflicts to climate change initiatives.
• Rising oil and oil product prices will increase the demand for EVs and other vehicles that run on alternative energy sources.
• Falling interest rates could increase the consumer demand for EVs.

The bottom line is DRIV, and the EV industry face many roadblocks in late 2023. However, the ETF has declined to near the midpoint of the March 2020 low and the November 2021 high, offering value. DRIV is a contrarian investment in November 2023, but betting against technological advances has been a mistake for years.

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