Morgan Stanley recently downgraded Tesla (TSLA Quick QuoteTSLA - Free Report) to Equal Weight from Overweight, with a new $425 price target, citing that the stock's valuation already prices in lofty expectations for AI, robotics, and Full Self-Driving amid slower electric vehicle (EV) adoption and competition. As expected, shares of the EV-maker dipped around 3% on Dec. 8, 2025 (as per a Yahoo Finance report) following the announcement. 

This highlights how vulnerable it can be to invest in a single stock. However, investors in EV-focused exchange-traded funds (ETFs) might take this event as an opportunity to revisit their portfolios, considering that Tesla held 41% of the U.S. EV market as of the third quarter of 2025 (as per data provided by Clean Technica).    

To this end, it is imperative to mention that popular EV ETFs hold auto stalwarts, such as Ford (F Quick QuoteF - Free Report) , General Motors (GM Quick QuoteGM - Free Report) and Volkswagen (VWAGY Quick QuoteVWAGY - Free Report) , in addition to Tesla, and are all ramping up EV investments. But before discussing how diversified these ETFs are and how they can cushion investors from sudden single-stock volatility, let’s take a closer look at what’s wrong with Tesla, where the company stands in the EV market and what the broader prospects for the EV industry look like. This should help an investor to make an informed decision regarding his or her asset allocation in EV-focused ETFs.

Tesla’s Downgrade & Shifting Dominance

Morgan Stanley’s analysts, in addition to downgrading Tesla’s rating, also slashed the company’s delivery forecasts through 2040. Notably, the firm expects Tesla’s delivery volume to decline 10.5% in 2026 and projects an 18.5% reduction in cumulative deliveries through 2040.

This trimmed delivery forecast seems to be the result of Tesla’s eroding dominance in EV market lately. For instance, in China, the world's largest EV market, Tesla's share shrank significantly in late 2025 due to fierce competition from local brands like BYD and Xiaomi.

However, the analysts at Morgan Stanley mentioned that Tesla is "uniquely positioned to be a leader" in the humanoid robot market, thanks to its existing manufacturing abilities and technological advantage. To this end, Tesla’s CEO Elon Musk has publicly stated that he believes the company’s values to eventually be dominated by its AI and robotics initiatives, specifically the Optimus humanoid robot, rather than its EV business. This reflects the company’s strategic decision to reduce focus on EVs and increase investments in AI, robotics and robotaxis.

Therefore, for investors interested in the booming EV market, investing in EV ETFs may make more sense than investing in Tesla shares.

EV Market’s Upward Trajectory

As the entire world steers toward a green future, the fundamental growth story for electric vehicles remains strong. Global consumer demand for EVs remains robust, with total battery electric vehicle sales in all analyzed markets having surged 35% in third-quarter 2025 compared to last year (as per an October Report from PWC). 

Growth is being driven by a surge in model availability and more affordable options. While traditional EV makers like BYD saw impressive sales results, legacy automakers have also achieved robust gains. Evidently, General Motors and Volkswagen saw year-over-year EV sales growth exceeding 100% in the third quarter. This expansion further underscores that the EV revolution is no longer dependent on just a handful of players, but is being driven by the entire industry.

Based on this, Gartner expects 116 million EVs to be on the road next year globally, reflecting a solid 30% surge.

EV ETFs: Your Diversification Shield

The discussion and growth projections outlined above make a compelling case for keeping EV ETFs, such as those listed below, on one’s watchlist. These ETFs offer a simple way to invest in the broader thematic shift toward electrification, encompassing automakers, battery producers, semiconductor suppliers, and technology enablers.

KraneShares Electric Vehicles & Future Mobility ETF (KARS Quick QuoteKARS - Free Report)

This fund, with net assets worth $80 million, provides exposure to companies engaged in the electric vehicle production, autonomous driving, shared mobility, lithium and/or copper production, lithium-ion/lead acid batteries, hydrogen fuel cell manufacturing, and electric infrastructure businesses. Its top three holdings include Contemporary (4.90%), the largest EV battery maker, TSLA (4.70%) and Panasonic (3.98%), another EV battery maker. 

KARS has soared 46.8% year to date. The fund charges 72 basis points (bps) as fees.

State Street SPDR S&P Kensho Smart Mobility ETF (HAIL Quick QuoteHAIL - Free Report)

This fund, with assets under management (AUM) worth $21.5 million, provides exposure to 79 companies whose products and services are driving innovation behind smart transportation. Its top three holdings include Lumentum Holdings (3.83%), a provider of optical and laser technology used in EV battery manufacturing, Ballard Power Systems (2.26%), a provider of hydrogen fuel cell technology used in EVs, and Garret Motion (2.18%), a provider of zero-emission technologies like electric turbochargers used in hybrid electric cars.

HAIL has surged 22.8% year to date. The fund charges 45 bps as fees.

iShares Self-Driving EV and Tech ETF (IDRV Quick QuoteIDRV - Free Report)

This fund, with net assets worth $169.8 million, provides exposure to 46 companies at the forefront of self-driving and EV innovation. Its top 10 holdings include Albemarle Corp (6.63%), a supplier of essential lithium carbonate and hydroxide for EV batteries, PLS Group (4.21%), a provider of lithium materials used in EV batteries, and Rivian Automotive (3.92%), a maker of adventure EVs. 

IDRV has soared 33.1% year to date. The fund charges 48 bps as fees.