IDRV - IDRV: Time For A Recharge

2023-11-25 08:18:59 ET

Summary

• IDRV tracks a portfolio of global electric vehicle stocks and companies involved in related technologies.
• The segment has underperformed in 2023, amid macro headwinds, despite what remains a strong long-term growth outlook.
• We are bullish on IDRV and expect electric vehicle stocks to rebound going forward.

The iShares Self-Driving EV And Tech ETF ( IDRV ) invests in companies that stand to benefit from the adoption of electric vehicles and the potential of autonomous driving technologies. While this segment has grown significantly over the past decade, the performance of IDRV has disappointed considering the fund is down 40% from its 2021 high.

Beyond the shifting macro environment including the impact of high interest rates since the pandemic-era boom, the challenge has been for the emerging players in the group to reach profitability. Headlines pointing to softer-than-expected EV demand have soured sentiment.

While it's fair to say that some of the most optimistic forecasts for the transition toward EV have yet to materialize, we believe the outlook remains positive. EVs continue to gain market share over internal combustion engine alternatives with worldwide policy initiatives supporting a long-term growth tailwind. Ultimately, we believe IDRV remains well-positioned to rebound.

What is the IDRV ETF?

IDRV technically tracks the "NYSE FactSet Global Autonomous Driving and Electric Vehicle Index". According to iShares, the idea here is to cover a broader transition into a low-carbon economy through companies at the forefront of self-driving and electric vehicle ((EV)) innovation.

The full supply chain extends through various industries covering not only EV manufacturers but also companies involved in related technologies with an emphasis on EV battery materials suppliers and EV battery producers.

Companies eligible for the index inclusion derive at least 50% of their revenue in these areas with constituents racked by a modified float-adjusted market capitalization weighting.

The other important dynamic of IDRV's strategy is its global profile. U.S. companies currently represent just 35% of holdings, followed by Chinese names at 22% and Korea at 11%.

In terms of sectors, we get into a gray area when talking about EVs. While the manufacturers can be classified as consumer discretionary names, the group also crosses over into the industrial sector and technology. Considering the battery suppliers, the materials sector comprises approximately 13% of the IDRV fund.

IDRV Portfolio

Going through the current portfolio of 52 stocks, a pair of Chinese EV makers between XPeng Inc ( XPEV ) and Li Auto Inc ( LI ) are the two largest holdings with a 9% and 6% weighting, respectively.

While Tesla Inc ( TSLA ) is recognized as the world's largest EV company by market value, the 5% weighting in the fund is just the 4th largest holding reflecting IDRV's specific methodology.

In this case, each stock's weighting is capped at 4% in the semi-annual rebalancing which was last completed in June. XPeng has been an outperformer over the period, climbing up 63% over the period, while Tesla is down -10% shifting their relative importance in the fund.

Down the list of holdings, big declines in smaller stocks like EV charging names and startup EV manufacturers have dragged lower the overall fund performance. Over the past year, IDRV is down -10%, with large losses in names like ChargePoint Holdings Inc ( CHPT ), Fisker Inc ( FSR ), and Lucid Group Inc ( LCID ) holding back gains from XPEV and Li Auto.

The overall poor sentiment toward EVs has translated to a sharp decline in lithium prices, down 75% year to date , as the primary component of electric vehicle batteries. Mining stocks including Pilbara Minerals Ltd (OTCPK: PILBF ) and Allkem Ltd (OTCPK: OROCF ) have been pressured by these trends.

So in terms of the fund's performance, what we're seeing right now is this divergence between some winners and broader volatility.

What's Next For IDRV?

The main takeaway here is that despite what can be described as uneven growth or an adjustment of expectations, EVs remain a high-growth market.

According to data from the research firm "Canalys", worldwide sales of EVs in the first half of 2023 climbed by 49% year-over-year to reach 6.2 million units. This includes both pure battery electric vehicles ((BEV)) as well as plug-in hybrids ((PHEVs)).

Within that total, China has been the growth driver with BYD Company Ltd (OTCPK: BYDDF ) controlling a 21% market share with its mass-market affordable models, while Tesla remains the BEV leader with a 15% share.

In the U.S., the pace remains strong, with EVs accounting for 7.9% of total passenger sales in Q3 , up from 6.1% a year ago and 7.2% in Q2. The trend has been that more and more companies are joining the mix, with EV sales climbing as a percentage of automakers' product lines. The expectation is that this momentum continues with total EV sales still on track to double over the next four to five years.

Even if there are uncertainties related to 2024 EV sales trends and what market share these technologies will capture over the next decade, it's understood that significant investments in the related infrastructure including EV charging will be necessary.

On the side of autonomous technology, the way we're looking at it is that while the concepts are already proven, an eventual acceptance of " level 5 autonomy " that requires zero human interaction will be a game-changer for the segment.

Everything from robo-taxis to autonomous trucking could drive a wave of productivity gains, revolutionizing various industries and ultimately turbocharging the demand for EV technologies. In our view, the companies within IDRV are still in the early stages of their global opportunity.

The upside here is that the recent weakness in EV stocks and the IDRV fund is that valuations have been reset lower. We can look back at 2021 in hindsight and describe those levels as a bubble, while the selloff may have now largely corrected those imbalances.

Going forward, we believe IDRV should benefit from a stronger macro environment into 2024 considering an outlook for stabilizing interest rates and a resilient economy. The potential that the demand for EVs outperforms what is now a lowered bar of expectations should be positive for the group.

IDRV vs DRIV

What we like about IDRV is that the fund is a pure play on this segment, for better or worse. This is in contrast to the alternative Global X Autonomous & Electric Vehicles ETF ( DRIV ), which while featuring a similar fund name, takes a more abstract approach by including "tech" stocks with names like Intel Corp ( INTC ), Nvidia Corp ( NVDA ), and Alphabet Inc ( GOOGL ) as top holdings.

While these tech leaders are great at what they do, we wouldn't normally describe them as capturing the essence of what an EV stock looks like.

By this measure, IDRV is a better representative of the theme recognizing its performance has disappointed more recently. IDRV can be used to complement a broader growth or tech-heavy portfolio, with some diversification benefits into names not otherwise widely held.

Final Thoughts

IDRV is a quality fund that performs exactly as intended to provide targeted exposure to the high-growth segment of electric vehicles. While the performance in recent years has disappointed, there are several reasons to look up and see a rebound on the horizon. EVs have been down, but there's no reason to count them out.

On the other hand, the main risk to consider is the possibility of a deteriorating economic backdrop. A deeper global slowdown or significantly weaker-than-expected EV sales trends would force a reassessment of our bullish outlook. The IDRV portfolio also carries FX risk considering the holdings in international stocks. Small caps within the portfolio are also expected to remain volatile.

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