Electric vehicles (EV) are nearing price parity with their internal combustion engine (ICE) and with climate change dominating everyday investing and social conversations, it's reasonable to expect advisors are fielding more questions about individual stocks like Tesla (NASDAQ:TSLA) as well as other avenues for gaining exposure to the EV super cycle.
Accessing the EV industry is important for plenty of clients in varying demographics because they view this as a practical expression climate awareness and sustainable investing. Additionally, depending upon in which state an advisor's practice is located, many advisors know that some states are prodding drivers to embrace EVs and writing laws to that effect. Looking at you, California.
Without commenting on the legal standing of state-level EV mandates (there's likely to be some legal challenges along the way), it's clear the automotive industry is being disrupted in significant fashion. Kudos to Tesla for getting that ball rolling.
As the EV demand grows, and it is, a lesson is emerging. How investors access the space is evolving, too. Indeed, there are efficient avenues for EV exposure advisors can discuss with clients, but it could pay to not focus so intently on the most obvious ideas.
Get on the Grid
Advisors know that automobile equities have histories of economic sensitivity and volatility and those traits pre-date Tesla, though Tesla has had plenty of bouts of equity market turbulence. Point is not all clients want automotive exposure and they're right to feel that way because many traditional auto manufacturers are far beyond Tesla in the EV race.
Good news: There are alternatives for EV exposure, some of which are practical. Consider investing around the electrical grid, a concept that's gotten more press in recent years due to sweltering summers in the West, the Texas freeze earlier this year and because, well, the U.S. electrical grid is in dire need of enhancing and Uncle Sam needs to spend big dollars to that effect.
In the EV conversation, the grid is relevant because most of the charging of these vehicles occurs at owners' homes, creating new strains on the grid. In California, home to one of the most strained grids in the world, officials are attempting to compel EV owners to charge at certain times of the day. That's onerous, but there's also investment opportunity in there.
“The Energy Information Administration forecasts that US electricity generation will grow by around 10% from 2020 to 2030, driven mainly by economic growth and offset by efficiency gains,” according to First Trust research. “However, this forecast assumes that new electric vehicle and plug-in electric hybrid vehicle sales grow from under 2% in 2020 to just 3.9% in 2030.”
Advisors that familiar with EV industry know that one of the primary stumbling blocks to broader adoption is lack of infrastructure. Said another way, plenty of states and the federal government itself want more EVs on the road, but they're approaching the situation backwards. Rather than building charging stations in anticipation of demand, government is waiting for more EVs to be on the road and the charging stations will come. So government says.
It's a flawed policy because it results in two scenarios: Drivers either resisting EVs or significant at-home charging with the latter carrying significant investment implications.
“Another reason that a transition to EVs may require more investment in the power grid is that 80%-90% of EV charging takes place at home,” adds First Trust. “Patterns of electricity consumption vary by season, but peak demand is typically in the evening, soon after people return home from work, which may also coincide with their desire to recharge depleted EV batteries. Considering that power grids in certain states, such as California, already face the risk of being overwhelmed when the weather gets too hot, the additional load from EVs must be addressed.”
GRID Investing Made Easy
Obviously, investing around the electrical grid is a nuanced concept, but it's clearly one with opportunity. Advisors can make grid investing easier for clients with the aptly tickered First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund (NASDAQ:GRID).
GRID, which tracks the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index, is a fly-by-night ETF. It's been around almost 12 years and $562.21 million in assets under management. And it's highly relevant today with potentially attractive long-term prospects.
“GRID is an ETF that invests in companies around the world that that are involved in power grid infrastructure, smart meters, energy management, connected mobility, and related activities. We believe many of these companies will provide the products and services needed for the build out and modernization of the power grid around the world,” adds First Trust.
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