DRIV - DRIV: Less About EV And More About Tech

2023-07-30 10:00:00 ET

Summary

• The Global X Autonomous & Electric Vehicles ETF has experienced significant outflows in the past year, likely due to investors cashing out from significant gains.
• The ETF's portfolio is fairly diversified, with top holdings including NVIDIA and Tesla, but it may not have a clear thematic exposure to EV/AV.
• Despite this, the ETF has outperformed the broad market and its peers, with better risk-adjusted returns and fundamentally sound holdings.

The promise of autonomous and electric vehicles has recently been delivering well as automakers flood the automobile markets with various brand new EVs across the globe. As they become cost-competitive and convenient for charging, consumer sentiment and demand on EVs have been overwhelming as the US EV sales hit 4mn by June this year , with Tesla dominating over 60% of market share. The recent AI boom has further catalyzed investments in EV and autonomous vehicles, which was reflected in the equities market. However, over the 1Y period, the Global X Autonomous & Electric Vehicles ETF (DRIV) has suffered from significant outflows totalling $172mn - likely due to investors cashing out from the significant gains. With that said, it is worth diving into DRIV to understand its portfolio characteristics and underlying potential given its current valuation.

The Global X Autonomous & Electric Vehicles ETF ((DRIV)) seeks to “provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Autonomous & Electric Vehicles Index” . The index mainly categorizes its holdings into three main segments - EV, EVC, and AVT as described below.

Each segment will have a set of keywords and companies are scored and ranked in each segment according to the frequency of keyword matches, and then weighted accordingly with a maximum allocation of 3% . Hence, this approach is not very sophisticated and may only be considering thematic alignment at the surface level without much consideration into the companies’ business model (i.e. leverage on revenue mapping etc).

As a result, DRIV is fairly diversified with its top 10 holdings taking up about 35% of the total fund weight. Large holdings such as NVIDIA and Tesla which exceed the 3% thresholds are caused by market value drifts with significant recent gains, and will be rebalanced semi-annually. Its top holdings actually mostly consist of technology companies which stand to benefit from the AI rally, instead of direct EV exposures through other automakers, such as Rivian or BYD in which its peer ETFs have high exposure to.

Despite having similar exposures to the automobile industry, the portfolio still consisted of several sectors, unsurprisingly led by consumer cyclicals and technology which have both outperformed the remaining sectors in the equity market.

Performance Review

Year-to-date, DRIV has outperformed the broad market ( SPY ) and all of its peers which include KARS and IDRV , where both have larger exposures towards pure automakers/ materials stocks rather than technology companies such as Apple and Alphabet in DRIV.

Since January 2021, DRIV performance has been flat, which only trailed SPY and still outperformed its peer ETFs. These performance reviews indicate that DRIV’s index methodology has been superior in returns to that of its peers given wider exposures to the technology sector.

Risk Analytics

DRIV has very similar annualized volatility to its peers at around 26%, which is substantially higher than SPY at 16%. The 5Y bollinger chart below also visualizes the price volatility of DRIV on a 3-month rolling basis, where it has been trading higher than its +1 sigma above the rolling mean - indicating a potential overbought.

Relative to the broad market ((SPY)), DRIV has had volatile periods of performance as its rolling-alpha recently bounced back to positive territory after trailing at sub-zero levels in the past months. Meanwhile, the rolling-beta chart also demonstrates the sensitivity of DRIV over SPY, which has been mostly trading above 1 and reaching 1.6 lately. This indicates that DRIV is very sensitive to price movements in the broad market as 1 point move in SPY will lead to 1.6 point move in DRIV.

Fundamental Deep Dives

The portfolio currently has a P/E ratio of around 15x, where SPY at around 23x and XLP at 26x. This seems untrue given its top exposures mostly being growth stocks with high valuations - however, its top exposures do not have majority of the price influence and many of its remaining holdings are more value-oriented industrials/ materials companies too. Except for NVDA and TSLA which have recently generated exponential gains through the AI boom recently (bringing them to record-high valuations), the remaining top holdings are tech companies with valuations roughly in line with current broad market expectations.

In terms of profitability, they vary significantly as they operate under different sectors with different business models. INTC , for instance, has poor return on equity and revenue growth, while MSFT produces strong return on equity as well as solid revenue growth.

Wall Street is generally bearish across the fund’s top holdings with target median price ranging from -22% for INTC to 13% for HON . As DRIV holds many names that have quite indirect exposures to the actual EV/ Autonomous Vehicle theme, it may be difficult to attribute the thematic growth on its performance.

Conclusion

In my view, DRIV does not actually provide a very clear thematic exposure to EV/ AV, but it instead holds many big tech names such as Apple, Google, and Microsoft which may have very indirect exposures to the theme currently (i.e. developments in EV/ AV space may not actually impact their stock prices much anyway). However, it has been providing superior returns compared to its peer ETFs with better risk-adjusted returns. The fund also has decent fundamentals despite poor market sentiment on many of its top holdings. Therefore, I would recommend a hold for DRIV as big tech names are starting to look less lucrative with higher valuations. If you're looking for more direct exposures to the EV/AV segment, you should definitely look elsewhere.

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