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Tencent Buys 5% Stake in Tesla: ETFs in Focus

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China’s Tencent Holdings has bought a 5% stake in U.S. electric carmaker Tesla Inc. (TSLA - Free Report) for $1.78 billion. This deal extends China’s presence in the U.S. automobile technology sector. The new technologies developed by U.S carmakers have attracted huge investments from Chinese companies.


This deal comes at a time when Tesla is gearing up to launch its Model 3 later this year. The cash infusion could help the company in a great way. Analysts predict that Tencent could help Tesla get deeper into the Chinese markets, which is the largest automobile market in the world. Even though Tesla’s China sales tripled last year, it was still less than a quarter of its U.S. sales.


Tencent is one of Asia’s largest tech companies with a market cap of $275 billion, almost six times that of Tesla.  It is best known for its mobile messaging app WeChat. It had earlier invested in Shanghai-based electric vehicle startup Nio (previously NextEV) and Didi Chuxing, the second largest ride sharing service company in the world.


Investors believe Tencent can be a great navigator for Tesla, not just in terms of increasing sales in China but also helping the Palo-Alto based carmaker expand its vehicular technology (see: all the Alternative Energy ETFs here).


Shares of Tesla rose 2.7% to close at $277.45 on Tuesday, March 28, 2017. What’s surprising is that Tesla’s market cap is just around $1 billion short of that of Ford. As a comparison, Ford sold 6.65 million cars last year compared with 80,000 for Tesla (read: Platinum ETF in Focus Amid High Inflows).


In the light of the recent development, let’s take a look at some ETFs that have significant exposure to Tesla:


VanEck Vectors Global Alternative Energy ETF


This fund tracks the Ardour Global Index, focusing on companies that are primarily engaged in the business of alternative energy.  It also provides good diversification in the sense that its holdings are well divided between large, medium and small cap companies.


The fund has AUM of $67.9 million and charges 62 bps in fees per year. The fund has an average daily volume of about 4100 shares. Tesla Motors occupies the top position in the basket with about 11.95% allocation. In terms of country exposure, the fund is skewed toward the U.S. with 53% share while Denmark also has a double-digit allocation with 11.8%. The fund has added about 3.33% in the past one year and 8.8% so far this year (as of March 29, 2017).


ARK Industrial Innovation ETF (ARKQ - Free Report)


This fund does not track any index in particular as it is an actively managed ETF seeking long-term capital appreciation. It looks for companies that stand to gain from the development of new products or services, or technological improvement and advancements in scientific research.


As such, the fund’s top rank holder is Tesla with an 11.6% holding. The fund has AUM of approximately $24.2 million and charges a fee of 75 basis points a year.  The average daily volume is about 8,700 shares. With more than 80% exposure to the U.S. equity market, it provides good diversification across large-, medium- and small cap companies. The fund has gained around 29.07% in the past one year and about 11.4% in the year-to-date frame (as of March 29, 2017).


ARK Innovation ETF (ARKK - Free Report)


This is an actively managed fund like ARKQ, providing significant exposure to the domestic technology and health care companies among others. The fund provides 9% exposure to Tesla.


The product has accumulated $17.7 million in its asset base and trades in an average volume of about 5,100 shares. Expense ratio comes in at 75 bps a year. The fund is also well-diversified among large-, medium- and small-cap companies.  It has gained 24.36% in the past one year and 18.65% in the year-to date time frame (as of March 29, 2017).


Bottom Line


Tencent’s investment comes in as a vote of confidence in Elon Musk and the future of this sector. With more than 373,000 pre orders for Model 3, Tesla is pinning its hopes on this launch to gain market share. Moreover, with city mayors enquiring about electric vehicles for commercial purposes, like police cruisers and street sweepers, the future of this industry looks bright (read: Electric Cars Find Favor with City Administrators: ETFs in Focus).


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