LI - IDRV: Why I Sold My EV ETF

2023-07-26 14:39:09 ET

Summary

• I have been working to reduce the number of equities in his portfolio for easier tracking and analysis and to (hopefully) boost his total returns.
• As a result, I recently sold shares in the iShares Self-Driving EV & Tech ETF to take advantage of a 31% YTD increase and to reduce portfolio overlap.
• I used the proceeds to increase my holdings in Jabil (a company that grew its Automotive Segment sales 47% last quarter) and in the Vanguard S&P500 ETF: VOO.

As my followers know, I have been on a multi-year effort to reduce the number of overall equities in my portfolio in order to make it easier to track and analyze, and to hopefully boost my overall returns. Along this line, I have taken advantage of a 31% YTD increase in the iShares Self-Driving EV & Tech ETF ( IDRV ) to sell my shares. This has nothing to do with my outlook on the global EV market - which remains bullish. However, today I'll discuss several reasons why the IDRV no longer fit in my portfolio. One of which is that back in the heyday of the fund (2021-22), IDRV had a large stake in Tesla ( TSLA ) and the fund was significantly outperforming the S&P 500 as represented by the Vanguard S&P 500 ETF ( VOO ):

However, the technology bear market of 2022 hammered IDRV, and I feel somewhat fortunate to have sold the remainder of my IDRV shares (I had previously sold half in early 2022) at a profit. Today, I'll discuss the other reasons I sold this fund.

Investment Thesis

I originally bought the IDRV ETF because I wanted some exposure to Tesla but was uncomfortable with its valuation level. At that time, IDRV had a greater than 10% stake in Tesla and owned several other attractive EV and tech stocks. It seemed like a nicely diversified way to gain exposure to the EV sector. And why not? After all, the EV transition is obviously accelerating:

However, today the IDRV portfolio is significantly different, with a much lower stake in Tesla and a larger stake in China-based companies. That concerns me as China appears to get more and more concerning with every passing day, and the "strategic partnership" with Russia is very troubling to me.

With this as background, let's take a closer look at IDRV ETF.

Top-10 Holdings

The top-10 holdings in the IDRV ETF are shown below and were taken directly from the iShares IDRV ETF webpage where investors can find additional information on the fund:

As can be seen in the graphic, Xpeng ( XPEV ), Li Auto ( LI ), and BYD ( OTCPK:BYDDY ) ( OTCPK:BYDDF ) are all China-based companies and, in aggregate, account for close to 15% of the entire portfolio. In total, and according to the end-of-Q2 IDRV FactSheet , the ETF currently has 16.4% allocated to China-based companies:

From a purely technical and investment perspective, the allocation of capital to China makes perfect sense. After all, China leads the world in EV production, effectively controls the global EV supply chains, and leads the world in EV battery technology and production. However, from a geopolitical standpoint, the risks are rising, in my opinion. China's increased belligerence toward Taiwan and its "unlimited strategic partnership" with Russia - despite that country's conflict in Ukraine - is very worrisome.

The IDRV ETF has two materials producers in the top-10 holdings: Pilbara Minerals ( OTCPK:PILBF ) and Allkem ( OTCPK:OROCF ), which combine for 7.4% of the portfolio. Pilbara is based in Australia and holds a 100% interest in the Pilgangoora lithium-tantalum project located in the Pilbara region of Western Australia. The stock is up a whopping 87% over the past year. Allkem is based in Argentina and produces lithium and boron. The stock is +44.8% over the past year. These are two excellent holdings.

However, another reason I sold IDRV was because of my decision in October of last year to establish a full-position in Freeport-McMoRan ( FCX ), a global leader in copper production (see FCX: Why ConocoPhillips' CEO Sold Oil & Bought Copper ). I also own a smaller position in the iShares MSCI Global Metals & Mining Producers ETF ( PICK ). The reason I mention these two equities is because I now feel that I have the EV "materials" thesis adequately covered (although I'm admittedly light in lithium production exposure) and therefore had some overlap with my allocation to IDRV.

While I do like the IDRV ETF's holdings in EV makers Rivian ( RIVN ), Tesla, and BYD, in aggregate (~14%) I'm not sure they are big enough positions to really "move the needle."

I also have full-positions in the semiconductor sector through my stakes in the VanEck Semiconductor ETF ( SMH ) and the SPDR S&P Semiconductor ETF ( XSD ). That's another reason I feel I have adequate exposure to EVs because these semiconductor companies are big suppliers to the EV makers. So too is Jabil ( JBL ), a favorite holding of mine and one that I added more shares to after selling my IDRV shares. Last quarter, JBL's automotive sales (primarily to EV makers) were $4.4 billion ( +42% yoy ) - its fastest growing segment.

Lastly, IDRV has an expense fee of 0.47%, which is arguably quite expensive even though owning foreign companies typically does require more management expense. This is another reason I sold the fund.

Performance

The IDRV ETF has a relatively solid performance track record, delivering a three-year average annual return of 15.36%:

However, over that same time frame the 2022 bear market in technology pulled IDRV back down toward the returns of the S&P 500, which is the foundation of my personal portfolio and the benchmark by which I measure my overall performance:

I mention that because IDRV was in the "growth" category of my portfolio and I expect that category to grow significantly faster than the S&P 500. At this point, I'm not sure IDRV will significantly outperform the S&P 500 going forward, especially if there is a global economic recession and a significant pull-back in the equity markets.

Risks

I already mentioned the geopolitical risks as a result of the IDRV ETF's allocation to China-based companies. The other side of that argument is that China could decide to reduce its belligerence, these companies could thrive, and investors could miss out on strong returns from an EV sector that is still dominated by China.

On a valuation basis, the IDRV ETF is quite cheap: It has a price-to-book of only 1.6x and a P/E of only 15.1x, both of which are significantly cheaper than the S&P500 (price-to-book of 4.5x and P/E = 26.4x).

Summary and Conclusions

The bottom line is I sold my IDRV stake for a number of various reasons, chief among them the direct exposure to Chinese companies, overlap with my other "materials" holdings, and a relatively high expense fee of 0.47%. In addition, it's part of my strategy to reduce the overall number of equity holdings in my portfolio to make it easier to track and analyze and - hopefully - to boost my returns. So far, I'm happy with the results. But only time will tell if the strategy can be deemed a success over multiple market cycles. Meantime, I took the proceeds from my IDRV sale to increase my stakes in JBL and the VOO ETF.

I'll end with a five-year chart comparing the total returns of those three equities:

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