etf.com Guide: How to Invest in the Electric Vehicle Revolution With ETFs

America’s roads could look radically different a decade from now: Around two-thirds of new light-duty vehicles and half of new medium-duty vehicles sold in the U.S. in 2032 could be electric if recently announced federal vehicle emissions standards from the Environmental Protection Agency go into effect. 

For comparison, only 5.8% of new cars sold in the U.S. in 2022 were electric.  

The potential for such a sharp increase in electric vehicle sales has investors excited about the investment opportunity in the EV space.  

Of all the current constituents in the S&P 500, EV maker Tesla has seen the second-best performance over the past decade—55.3% per year. 

EV manufacturers aren’t the only ones capitalizing on the growing demand for EVs. There’s an entire supply chain dedicated to the production of electric vehicles. 

This includes producers of lithium and cobalt, which are key ingredients in the batteries that power EVs; producers of those batteries; manufacturers of EV components such as electric motors, inverters; and charging systems; as well as companies involved in the recycling and disposal of EV batteries.  

Additionally, there are companies that provide charging infrastructure and software for EVs as well as those that offer services related to EV maintenance and repair. 

Because of the wide variety of companies involved in the EV production process, exchange-traded funds—which offer investors exposure to a basket of stocks—are a natural way to capture this theme.  

Today there are a dozen EV-related ETFs on the market, but before we get into those, let’s identify the opportunities and challenges facing investors in this industry.  

Poised for Growth 

The EV opportunity is massive.  

Even though they get a lot of attention, electric vehicles are still a relatively small portion of the overall vehicle market. 

They made up 5.8% of new cars sold in 2022, but only around 1% of the total number of cars on America’s roads today are electric.  

That will almost certainly rise in the coming years, not only because of government mandates, but because EVs are increasingly attractive to consumers when compared to traditional internal combustion engine vehicles.  

A growing awareness of climate change has caused consumers to worry about their carbon footprint, making EVs more compelling than ICE vehicles for many of them.  

EVs have fewer moving parts, which means they require less maintenance. The Department of Energy estimates that the maintenance cost for a light-duty battery-electric vehicle totals 6.1 cents per mile, compared to 10.1 cents per mile for a conventional ICE vehicle. 

Source: Department of Energy  

And of course, EVs are often much cheaper to fuel than their ICE counterparts, especially when gas prices are high.  

In addition to these organic drivers of EV adoption, governments are pushing to see greater EV uptake as well. The Inflation Reduction Act, passed in 2022, provided two key incentives that have helped make EVs much more affordable. 

One is tax credits for producers of EVs who use batteries in which 80% of critical minerals are sourced domestically or from U.S. free-trade partners—an incentive designed to strengthen the resiliency of America’s EV supply chain.  

The other is a $7,500 tax credit for consumers who purchase electric sedans with a price tag of less than $55,000 and electric SUVs that cost less than $80,000.  

Combined, these incentives could help EVs reach price parity with ICE vehicles as soon as this year, according to the International Council on Clean Transportation. Without them, price parity would likely still be reached in the next several years.  

On average, without any tax credits, a new electric vehicle currently costs over $60,000, while a new ICE vehicle is just under $50,000, according to Kelley Blue Book. 

Government Mandates  

While the strong uptake of EVs would likely happen with or without government mandates, it doesn’t hurt that governments are pushing for greater adoption of the technology.  

The EPA’s stringent emissions targets are rooted in the Biden administration’s goal of reducing America’s carbon emissions.   
  
The regulations “would avoid nearly 10 billion tons of CO2 emissions, equivalent to more than twice the total U.S. CO2 emissions in 2022, while saving thousands of dollars over the lives of the vehicles meeting these new standards and reduce America’s reliance on approximately 20 billion barrels of oil imports,” the EPA said. 

Meanwhile, California has taken even more aggressive steps to usher in the EV age. The state’s Advanced Clean Cars II requires that 100% of new cars and light trucks sold in California to be zero-emission vehicles by 2035.  

While some of these regulations may be challenged in the courts, the overall trend is clear: Consumers are increasingly turning toward EVs and governments are speeding up the process.  

This holds true not only in the U.S., but around the world. 

The shift from ICE to electric vehicles is a global phenomenon. In fact, EV adoption outside of the U.S. is greater than it is in the U.S. According to data from Counterpoint research, 14% of new passenger vehicles sold in 2022 globally were EVs. 

Demand is particularly strong in China, where 59% of all EVs were sold. 

Challenges  

Though the outlook for EVs is bright, like any emerging technology, there are challenges. 

There are concerns about the environmental impact of the materials used in EV batteries and the production process itself. While EVs produce zero emissions during operation, the mining and manufacturing of battery materials can be highly polluting and energy intensive. 

Meanwhile, in many regions, there is a lack of EV charging infrastructure. While many cities and urban areas have installed charging stations, there are still vast swaths of the country where charging stations are few and far between. This can make it difficult for drivers to take long trips or to use their EVs for extended periods without worrying about running out of power. 

But with any challenge lies opportunity. Some companies are working on using lithium-ion batteries for other purposes once they’ve completed their “first use” within EVs. Others are developing methods to efficiently recycle used batteries so that the raw materials within them, such as cobalt and copper, can be put into new batteries.  

The Case for ETFs  

Given the vast potential of the EV industry, how should investors best capitalize on the growth? While single stocks like Tesla offer investors a lot of upside potential, there are safer ways to invest in the industry.  

Even though Tesla could still be a big winner from here—the company certainly has a die-hard investor base—it makes sense to diversify across the broader industry.  

Issues related to a particular company that have nothing to do with the industry at large could create a lot of volatility in a single stock, making it a much riskier investment than holding a more diversified basket of stocks. 

Indeed, after dominating the EV market for years, Tesla is now facing stiff competition, both from legacy automakers like GM and Ford, as well as new EV-only upstarts like Rivian and Lucid Motors.  

Investors in single stocks could also miss out on strong performance in some areas of the EV industry in which their companies don’t operate.  

Three Buckets  

There are a dozen ETFs that investors seeking exposure to the growth of the EV industry might find useful. They can broadly be put into three buckets: ETFs that invest in the entire EV industry (and beyond); ETFs that invest in a segment of the EV industry; and ETFs that invest in autonomous vehicles and other futuristic transportation technologies.  

The funds that invest across the EV space usually leave room for stocks of companies that are developing autonomous technologies.  

Autonomous vehicles are currently in the pilot phase, where they’ve been stuck for years. Companies like Waymo, Cruise and others are testing these driverless vehicles in select cities, but it’s been a tough slog to get these cars to become safe enough to operate outside of predefined boundaries.  

Still, gradual progress is being made, and one day, autonomous vehicles—most of which will be electric—may rule the roads. The thesis behind investing in autonomous vehicles is that it is the next evolution of transportation, beyond even EVs.  

The ETFs 

These ETFs provide broad exposure to stocks in the EV space as well as other transportation technologies like AVs and even drones: 

Global X Autonomous & Electric Vehicles ETF (DRIV) invests in companies involved in the development of autonomous vehicle technology and electric vehicles.

iShares Self-Driving EV and Tech ETF (IDRV) invests in companies involved in electric vehicles, battery technologies and autonomous driving technologies. 

KraneShares Electric Vehicles and Future Mobility Index ETF (KARS) bets on companies involved in 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. 

Fidelity Electric Vehicles and Future Transportation ETF (FDRV) invests in a global universe of companies across the market capitalization spectrum engaged in the production of electric and/or autonomous vehicles and their components, technology, or energy systems or that are engaged in other initiatives that aim to change the future of transportation. 

The First Trust S-Network Future Vehicles & Technology ETF (CARZ) includes companies engaged in the electric and autonomous vehicle manufacturing; enabling materials; or enabling technologies sectors.   

Smart Transportation & Technology ETF (MOTO) invests in companies that manufacture, distribute, service, offer, support or enable the following: electric vehicles, autonomous vehicles, transportation as a service, flying autonomous vehicles, autonomous or electric public transportation and hyperloop-based transportation, for passengers or goods.

Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares (EVAV) includes electric and autonomous vehicles companies. These ETFs are more focused on the transportation tech beyond EVs—especially autonomous vehicles—though their portfolios overlap with the broader ETFs: 

SPDR S&P Kensho Smart Mobility ETF (HAIL) invests in companies whose products and services are driving innovation behind smart transportation, which includes the areas of autonomous and connected vehicle technology, drones and drone technologies used for commercial and civilian applications, and advanced transportation tracking and transport optimization systems. 

Simplify Volt RoboCar Disruption and Tech ETF (VCAR) invests in a handful of disruptive companies that the issuer believes are poised to dominate autonomous driving, and then enhances the concentrated exposures with options. 

And these funds invest in metals, mining or batteries: 

Global X Lithium & Battery Tech ETF (LIT) bets on companies throughout the lithium cycle, including mining, refinement and battery production. 

Amplify Lithium & Battery Technology ETF (BATT) invests in a portfolio of companies generating significant revenue from the development, production and use of lithium battery technology, including battery storage solutions, battery metals and materials as well as electric vehicles. 

Invesco Electric Vehicle Metals Commodity Strategy No K-1 ETF (EVMR) invests in commodity-linked futures and other financial instruments that provide exposure to a diverse group of metals commonly used to produce electric vehicles. 

Separating the aforementioned ETFs into three buckets makes it easier to narrow the choices, but investors should still look under the hood to get a closer look at the funds’ strategies and holdings. 

Here are some additional considerations for these funds: 

• LIT is the largest among the ETFs, with $3.3 billion in assets under management. It competes with the $160 million BATT, which also invests in lithium miners and companies involved in battery production.   
   
• The $21 million EVMT takes a different approach by investing in the metals that are used within batteries, such as nickel, copper, aluminum, cobalt and iron ore. The fund doesn’t currently hold lithium, as the metal currently lacks a market with enough liquidity to meet the ETF’s requirements.    
   
• There can be overlap between the holdings of some of the broad EV ETFs. In addition to Tesla, semiconductor giant Nvidia—which makes chips and software for autonomous vehicles and infotainment systems—is a consistently large holding in these funds.    
   
• Despite having similar goals, the way these funds go about providing exposure can vary significantly. This results in portfolios that can be quite distinct. IDRV is weighted heavily toward auto manufacturers, while CARZ owns significant megacap tech.   
   
• The geographic breakdown of these ETFs can vary also. DRV and FDRV have around 60% of their portfolios in U.S. stocks, while IDRV and KARS allocate only 37% and 25%, respectively, of their portfolios to U.S. stocks.  

Takeaways 

> The U.S. could see a significant increase in the adoption of EVs in the coming decade, with two-thirds of new light-duty vehicles and half of new medium-duty vehicles sold in the U.S. in 2032 potentially being electric, up from just 5.8% of new cars sold in the U.S. in 2022. 

> The EV opportunity is massive, with organic drivers of EV adoption including lower maintenance costs, lower fuel costs and greater environmental sustainability. Governments are also pushing for greater EV uptake, with regulations such as the EPA's stringent emissions targets and California's Advanced Clean Cars II. 

> The EV shift is not limited to the U.S., with EV adoption outside of the U.S. greater than within it. EVs made up one of every 10 cars sold worldwide last year. China in particular is leading the way, with 59% of all EVs sold globally.  

> The EV industry doesn’t just contain vehicle manufacturers. There are various companies involved in the EV production process, including lithium and cobalt producers, battery manufacturers, EV component manufacturers, charging infrastructure and software providers, and EV maintenance and repair services. 

> Investors can capture this theme through ETFs, with a dozen EV-related funds currently available on the market. These include ETFs that invest in the entire EV industry (and beyond), ETFs that invest in a segment of the EV industry, and ETFs that invest in autonomous vehicles and other futuristic transportation technologies. 

For more information on these ETFs, see our fund reports linked above, which make it easy to find key information on individual ETFs, and our ETF comparison tool, which enables investors to easily compare ETFs side by side. 

By Sumit Roy

Follow Sumit Roy on Twitter @sumitroy2