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Tesla Plans Another Megafactory in China: ETFs to Buy

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Tesla Motors (TSLA - Free Report) is set to open another factory in Shanghai, China, to give boost its megapack energy product, which is a powerful battery, requiring minimal maintenance. Each megapack unit can store over 3 MWh of energy.

The construction for the new plant is set to commence in the third quarter of this year and be completed by the second quarter of next year. The new factory in Shanghai would enhance the megapack product line by 10,000 units each year, in addition to the 10,000 units already being produced at the California megapack plant. The additional 10,000 units will add 40 gigawatt hours of energy storage.

Tesla Motors reported record deliveries for the first quarter, fueled by higher demand due to big price cuts across the globe. However, the automotive company has to recall around 420 units of Model 3 in the United States due to an issue in the front suspension lateral link fasteners, per an article on Reuters. (Read: Tesla Rolls Out Record Deliveries in Q1: ETFs in Focus)

How Will the China Factory Give a Boost to Tesla?

Tesla aims to take advantage of China’s world-leading battery supply chain to increase its output and reduce the costs of its lithium-ion battery units of megapack. Investors should note that the Megafactory will be situated in Lingang, a huge free trade zone at the peripheries of Shanghai, where Tesla’s electric-vehicle Gigafactory was incepted in 2019.

That facility was constructed within 10 months, at 65% of the cost of the Model 3 production plant in the United States. The cost reduction number clearly shows why Tesla is betting big on China and how the new China factory would help Tesla’s profits.

China itself is emerging as a huge market for Tesla. Last week, the China Passenger Car Association said the company sold 88,869 units of Shanghai-made EVs in March, as quoted on CNN.

Factors Affecting the Ongoing Profitability of Tesla

The company unleashed a price war in January by cutting its prices by about 20%. Tesla cut prices in the range of 2% to 6% in the United States last week, making it the fifth price cut since the start of the year. According to a Reuters article, some analysts expect that this move by the electric automotive company could hurt its profitability.

Stringent electric vehicles tax rules by the U.S. Treasury Department, to remove or reduce the tax credit on some electric models, would lower reduce the tax credit on Tesla’s base Model 3 by $7,500. The move is apparently intended to drive sales of U.S.-built electric cars.

Hence, the stance by the United States, to reduce its dependence on China for the EV battery supply chain can be a cause of concern for the firm, increasing volatility in the government’s policies. The rising geopolitical tension between the two countries does not help Tesla either.

ETFs in Focus

Tesla currently has a Zacks Rank #3 (Hold) and belongs to a top-ranked Zacks industry (in the top 42%). Against this backdrop, we highlight a few Tesla-heavy ETFs for investors who expect the company to gain meaningfully from this new China Megafactory.

Consumer Discretionary Select Sector SPDR (XLY - Free Report)

The Consumer Discretionary Select Sector SPDR ETF tracks the Consumer Discretionary Select Sector Index, which seeks to represent of the consumer discretionary sector of the S&P 500 Index. The fund has a basket of 53 securities with 15.5% exposure in Tesla.

The fund has an asset base of $14.08 billion and charges an annual fee of 10 bps. It has a traded daily average volume of about 5.62 million shares. XLY has a Zacks ETF Rank #1 (Strong Buy) with a medium term risk outlook.

Meet Kevin Pricing Power ETF (PP - Free Report)

The Meet Kevin Pricing Power ETF is an actively managed exchange-traded fund that seeks to achieve its investment objective by investing primarily in the U.S. listed equity securities of innovative companies, which in Kevin’s view have comparatively more “pricing power” than its peers. The fund has a basket of 17 securities. Tesla, being an industry leader in profit margin, has 24.98% exposure in the fund.

Notably, the fund has amassed an asset base of $22.8 million and charges an annual fee of 77 bps. It trades in an average daily volume of around 31,000 shares.

ARK Autonomous Technology & Robotics ETF (ARKQ - Free Report)

The ARK Autonomous Technology & Robotics ETF is actively managed and seeks long-term growth of capital by investing in companies that benefit from the development of new products or services as well as technological improvement and advancements in scientific research related to energy, automation and manufacturing, materials and transportation. The fund has 37 securities in its basket, with an exposure of 13.56% in Tesla.

The fund has gathered $896.48 million in its asset base. It trades in an average daily volume of about 81,000 shares and charges an annual fee of 75 bps.

ARK Innovation ETF (ARKK - Free Report)

The ARK Innovation ETF seeks long-term growth of capital by investing in companies according to the fund’s theme of “disruptive innovations.” Companies within ARKK include those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research in areas like Automation, Robotics, and Energy Storage and AI.

The fund has 9.67% exposure in Tesla, with a total of 29 securities in its basket. It has amassed an asset base of $7.28 billion and charges an annual fee of 75 bps. ARKK trades about 28 million shares a day, on average.

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