Tesla Going Private Could Hit Many ETFs

August 07, 2018

What Comes Next?

Once an acceptable tender offer has been made and accepted, the ETFs would be left with a Tesla-shaped hole in their portfolios that would need to be filled.

In the case of passive funds, most index rules state that the index should immediately be rebalanced as of the time of a corporate action, just as with a split, bankruptcy or merger.

"In practice, however, this kind of process would take some real time to enact," said Nadig.

Active ETFs without a benchmark, meanwhile, would have more leeway in how and when to rebalance their portfolios.

"It'll be interesting to see what the ARK funds, for example, do in terms of their ownership over the next few days, since they can immediately cut or increase shares," said Eric Balchunas, senior ETF analyst for Bloomberg. "If at the end of the road they made more money than passive funds, then it could be a good feather in the cap for active management."

How Much ETF Impact?

Given the low relative proportion of Tesla stock held by ETFs, however, "not a lot is going to happen" for most investors, says Balchunas. He added that ETFs own a "shockingly low amount" of Tesla shares outstanding, currently around 3%.

"But that's sort of what you sign up for with an ETF," he added. "You don't feel as much of these single-stock shocks to the system."

The higher percentage of an ETF's portfolio is held in Tesla, the more turnover there would be in its holdings. In this case, the $161 million ARK Industrial Innovation ETF (ARKQ), the $91 million VanEck Vectors Global Alternative Energy ETF (GEX) and the $97 million First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) would have some substantial rejiggering to do should Tesla go private; these funds currently hold 11%, 9% and 8% of their portfolios in the company, respectively.

The 10 ETFs with the highest percentages of their portfolios in Tesla are listed in the table below

 

ETFs Holding Highest % Of Portfolio In Tesla
Ticker Fund TSLA Allocation TSLA Market Value ($M)
ARKQ ARK Industrial Innovation ETF 10.59% 16.45
GEX VanEck Vectors Global Alternative Energy ETF 9.46% 8.49
QCLN First Trust NASDAQ Clean Edge Green Energy Index Fund 8.40% 7.98
ARKK ARK Innovation ETF 7.95% 93.16
ARKW ARK Web x.0 ETF 6.06% 40.74
LIT Global X Lithium & Battery Tech ETF 4.66% 42.16
CARZ First Trust NASDAQ Global Auto Index Fund 4.41% 0.82
KARS KraneShares Electric Vehicles and Future Mobility Index ETF 3.00% 1.00
XKST SPDR Kensho Smart Mobility ETF 2.96% 0.18
ICAN SerenityShares Impact ETF 2.89% 0.12

Tables sources: ETF.com, FactSet; data as of Aug. 7, 2018

 

Though ETF ownership is small, some funds would be more impacted than others, particularly environmental, social and governance (ESG) and tech funds.

Thirteen socially responsible ETFs hold Tesla, including the three largest funds in the space: the $1.2 billion iShares MSCI KLD 400 Social ETF (DSI), the $754 million iShares MSCI U.S.A. ESG Select ETF (SUSA) and the $532 million iShares MSCI ACWI Low Carbon Target ETF (CRBN).

Meanwhile, only five technology sector ETFs hold shares of Tesla, but four of them are fairly popular: the $2.4 billion iShares Exponential Technologies ETF (XT), the $989 million SPDR NYSE Technology ETF (XNTK), the $688 million ARK Web x.0 ETF (ARKW) and the $161 million ARK Industrial Innovation ETF (ARKQ).

Contact Lara Crigger at [email protected]

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