Tesla Driven Out Of These ETFs

With Tesla’s recent entry into the trillion-dollar market cap club, some investors worry the price of this stock has gotten ahead of itself.

While our earlier article discussed Tesla’s heavyweight status in a multitude of ETFs, our Stock Finder tool can be used to highlight some ETFs that underweight this stock relative to the SPDR S&P 500 ETF Trust (SPY).

Chart courtesy of FactSet

Currently, Tesla makes up just over 2% of the cap-weighted index of large cap stocks. Searching for Tesla stock and sorting the allocation column from smallest to largest shows there are quite a few large cap ETFs that have significantly lower weightings to the automaker.

Some ETFs, like those that have “low volatility” or “value” in the name, are no surprise. But other fund names make one question why Tesla’s holding is minimal relative to those ETF's likely investment universe.

Fundamental ETFs Stay Away

The Schwab Fundamental U.S. Large Company Index ETF (FNDX) currently holds just 0.03% of the portfolio within Tesla stock. This ETF tracks an index that weights stocks based on factors such as sales, cash flow, dividends and buybacks.

The Invesco FTSE RAFI U.S. 1000 ETF (PRF) is another large cap ETF that selects and weights stocks using fundamental metrics. Tesla currently makes up about 0.07% of PRF’s portfolio.

Both of these ETFs have similar top holdings, and while some names also appear in the top holdings of SPY, there are some clear differences as well.

Chart courtesy of FactSet

All three ETFs hold Apple as their top holding. Microsoft, Berkshire Hathaway Inc. Class B and JPMorgan Chase are also held within the top holdings of all three ETFs.

Meanwhile, names like Exxon Mobil, Wells Fargo, Chevron, AT&T and Bank of America appear in the top holdings of FNDX and PRF, but are not a top holding in SPY.

Fundamentals Drive Performance

Weighting companies by these fundamental factors rather than market cap has recently been advantageous to ETFs such as FNDX and PRF. Over the trailing year, both funds have outperformed SPY.

One criticism of cap-weighted indexes such as that tracked by SPY is that the more overvalued a stock gets, the higher its weighting in the index. The inverse is true as well–if a stock is undervalued, it will have lower representation in the index.

A benefit of weighting stocks by their underlying fundamentals is that these factors are more likely to be an indicator of future performance. A stock’s current price doesn’t necessarily have that same predictive value.

ESG ETFs Allocations Differ
In spite of Tesla’s heavy weighting in some ESG ETFs, there are even some environmentally friendly funds that hold significantly lower weightings to the company versus SPY, a fund with no ESG mandate.

The Etho Climate Leadership U.S. ETF (ETHO) holds just 0.6% of the portfolio in Tesla. The portfolio’s smaller weighting to this stock is due to tracking an equal-weighted index, rather than a call on the stock’s fundamentals. The ETF’s largest holding, NVIDIA Corporation, has just a 0.64% weighting.

Chart courtesy of FactSet

And though the Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX) sounds like an ETF that might hold a position in Tesla, the stock is excluded from the ETF entirely. CHGX tracks an index of 100 U.S. large cap stocks that meet ESG standards.

CHGX has held Tesla at certain points in the past, as the index is based on a proprietary ESG risk factor methodology.

According to Brittany Damico, senior business development manager at Change Finance, Tesla’s exclusion is due to the automaker’s anti-labor stance and behavior. 

Tesla’s exclusion from this ETF also underscores the importance of analyzing an ETF’s holdings rather than relying on the name alone to understand what the fund offers exposure to.

Whether or not one wants exposure to Tesla, the wide range of available ETFs means an investor is likely to find something that fits their viewpoint.

Contact Jessica Ferringer at [email protected] or follow her on Twitter