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Caution and Limiting Risk Important When Investing in Tesla

Regardless though of what the stock has done in the past, anyone considering investing in Tesla today should be cautious and try to limit their risk as much as possible.

 

Shares of electric car maker Tesla Inc. (TSLA) are down nearly 50% since December of 2018. That is quite a fall and one that attracts the attention of investors looking to buy a stock after it has shed a large amount of its value in the hopes that the stock price will rebound in the future.

We have seen Tesla’s stock crash before and bounce back even higher. This gives hopes that the company can turn things around and the stock will once again see the $300 handle. Regardless though of what the stock has done in the past, anyone considering investing in Tesla today should be cautious and try to limit their risk as much as possible.

One way of doing this is by simply buying an Exchange Traded Fund, which has a position in Tesla. That way if the stock continues to crash and eventually burns, your investment doesn’t take as much of a hit as if it would if you directly purchase shares of Tesla. On the flip side, if Elon Musk stabilizes the company and investors begin to believe his story, causing Tesla to climb higher, you reap the rewards, and the ETF will also move higher. While the move higher in an ETF may not be as substantial, it would still increase in value if it held a large portion of the auto-maker.

With that in mind, let us take a look at a few different ETFs that hold varying sizes of Tesla in their portfolio’s.

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The first ETF is the ARK Innovation ETF (NYSEARCA:ARKK), which has Tesla as its top holding. Tesla represents 9.96% of the fund’s assets. The fund has 38 different positions, which are companies that focus on disruptive and innovative firms. Despite Tesla’s poor recent performance, the fund is still up 11.64% and down just a half of a percent over the last 12 months. ARKK would see a massive move upwards if Tesla regained the value it has lost, but due to its exposure to the electric car company, if Tesla does continue to decline, ARKK will certainly take a substantial hit.

The next ETF is the Global X Lithium & Battery Tech ETF (NYSEARCA:LIT), which has 4.86% of its assets in Tesla. That amount makes Tesla the ETFs 10th largest holding. Furthermore, LIT’s top ten stocks make up 73% of its value despite having 39 different positions. LIT’s exposure to Tesla is half of that which ARKK but you still need to remember that LIT is focused on global lithium miners and battery producers. Which means, if Tesla goes bankrupt, the whole industry could be hurt, and LIT will likely decline in value. But, if Tesla figures out how to increase the production of its electric vehicles, it will likely start absorbing more and more of the metal and therefore help the whole industry. LIT is once again a rather risky play because it could have more exposure to Tesla than just from a single-stock standpoint.

A safer option would be to purchase shares of the First Trust NASDAQ Global Auto Index Fund (NYSEARCA:CARZ). This is an ETF that tracks a market cap weighted index of global automakers. Tesla represents just 2.72% of CARZ’s assets. CARZ’s has 34 positions with it’s top ten making up 61% of the fund, and Tesla is not part of that group. This would be a great ETF if you believe in what Tesla is trying to do in terms of changing the auto industry from burning fossil fuels to becoming more environmentally friendly but just aren’t sure if Tesla is going to be the company that truly makes that happen. And honestly, I would agree that Tesla isn’t going to make that happen alone. If the auto industry wants to move to electric, while Tesla may have been the one that started the fire, the other players are going to be who keeps it burning.

CARZ will benefit from Tesla’s stock price increasing, but it will not feel the same pain as the other ETFs mentioned if Tesla’s drop continues. Lastly, CARZ would also benefit if another automaker ends up buying Tesla, which has been a new option being thrown around by analysts and other market participants over the last few weeks.

Tesla has and will likely continue to be a highly debated stock that experiences big moves both higher and lower. Using ETFs to gain exposure to the stock is one way of protecting your assets while still having a little skin in the game.