What Ron Baron’s Latest Take on Tesla Means for ETFs

What Ron Baron’s Latest Take on Tesla Means for ETFs

The investor sees the car maker’s stock accelerating four to five times by 2030.

Reviewed by: etf.com Staff
Edited by: Mark Nacinovich

Ron Baron, a noted mutual fund manager and investor who founded Baron Capital, loves electric-car maker Tesla’s (TSLA) stock. That is not news.  

And yet Baron’s recent statement that Tesla’s stock could be worth four to five times its current market capitalization by 2030 has implications for ETF investors, as well as for shareholders of his nearly 30-year-old Baron Growth Fund (BGRIX).  

Because the bigger Tesla's stock market value becomes, the more exchange-traded funds it will influence. That’s assuming it doesn’t implode, which is always a possibility for a business that habitually cuts costs to bet on increasing market share. 

Winning With Tesla

Baron has been a big winner as an early investor in the company, and so his recent comments can’t be dismissed as simply hyperbole. 

Tesla’s market cap sits at just under $700 billion, and so a fivefold increase would get that to $3.5 trillion. The stock is already selling at 70 times trailing earnings and nearly eight times sales. 

The company’s revenue growth has been very strong. But the future is what we are talking about here. And as Yogi Berra said, predictions are difficult, especially about the future. 

Volatile Stock  

Tesla’s price of $217 as of Monday is well above its low of $100 this past January and about half its all-time high of $400, exactly two years ago. So, volatility comes with the territory. 

While Baron is a decorated fund manager, his fund has tended to fluctuate in value in a pattern not unlike Tesla CEO Elon Musk’s liquid net worth from owning Tesla’s stock. 

Since the start of 2007, a period that includes the global financial crisis and all that has come since, Baron Growth Fund has made a 333% return. The SPDR S&P 500 ETF Trust (SPY) has made 324% over that same period. So, a 9 percentage point cumulative total return advantage for Baron over 17 years. 

The Baron fund has gained as much as 103% in a 12-month period and has lost 40% over the same period of time. So, like investing in TSLA stock, this is pure long-term growth investing, for better or worse. 

Tesla ETFs 

And that is where ETFs can help TSLA fans and detractors alike. The natural diversification of ETFs allows investors to participate in the potential share price growth of the innovative car company, but with other stocks around it to cushion the inevitable bumps in the road. And the recent introduction of multiple single-stock ETFs allows them to lever their TLSA position or effectively short the stock.  

The etf.com stock finder tool reveals that 338 ETFs hold Tesla’s stock, including SPY, which has a 1.6% weighting currently. But for investors looking to deploy a “TSLA and friends” strategy, where Musk’s automobile company is a feature of the portfolio, but is surrounded by peers, the Consumer Discretionary Select Sector SPDR (XLY), which has been around since before Tesla existed, has a 16.8% allocation to the stock.

And the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) has 8.8% of its asset in Tesla's stock. 

But for those who don’t simply want to hedge their TSLA position by surrounding it with other stocks, the Direxion Daily TLSA Bull 1.5X Shares (TSLL) aims to deliver Telsa on steroids, so to speak, by owning the stock and applying 50% leverage. 

And, for those who think that Baron’s take on Tesla is, shall we say, barren, there’s the counteroffer from the same ETF provider, the Direxion Daily TSLA Bear 1X Shares (TSLS). Don’t let the fund's relatively low asset base fool you. It trades nearly half that amount in average daily volume ($23.5 million), a reminder that leveraged and inverse ETFs are to be considered with extra caution. 

The same can be said for any investor who projects a $3 trillion higher market cap for one of his largest holdings. Predications for what may be seven years from now are quickly forgotten. But investors should take this story and use it as a reminder that ETFs offer the flexibility to act on your own particular views on any stock, sector, industry or theme. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.