Tesla (TSLA -1.92%) is a fan favorite among many individual investors. And even after the stock's decline over the past year or so, it has still been a rewarding stock over the long term.
But as great as the automaker's historic returns have been, it's usually a bad idea to go all-in on a single stock or industry. The good news is that there are plenty of exchange-traded funds (ETFs) with the company as a core holding.
Investors looking to build a portfolio around Tesla might be interested in the Consumer Discretionary Select Sector SPDR Fund (XLY -0.87%), the Ark Innovation ETF (ARKK -2.12%), or the First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN -0.81%). Here are the pros and cons of each ETF.
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The Consumer Discretionary Select Sector Fund might surprise you
The consumer discretionary sector is chock-full of iconic brands that tend to sell more goods and services when the economy is doing well. Nike (NKE -1.26%), Starbucks (SBUX 0.53%), and McDonald's (MCD 0.37%) are all top 10 holdings in the fund.
And while you can argue that all of these companies are going to do well regardless of a recession, consumers are more willing to buy things they don't need when wages are growing, jobs are aplenty, interest rates are low, and the economy is rolling.
Other key holdings include Home Depot and Lowe's -- which make up a combined 12.8% of the fund. Again, here's an example of two top brands that depend on strong consumer spending to drive growth in home building, home improvements, repairs, maintenance, and the like.
There are plenty of retail and restaurant stocks, hotel stocks, and car and car-service stocks in the fund as well. But two companies alone make up a staggering 40.5% of the fund: Amazon (AMZN -2.56%), with a dominant 24.3% weighting, and Tesla, in second place with a 16.2% weighting.
Amazon and Tesla are two of the largest U.S.-based companies by market cap and are unrivaled in their respective industries. Amazon Web Services makes up the majority of Amazon's profits and cash flow, while its e-commerce and ad businesses make up the bulk of revenue.
Amazon has been under pressure lately for overexpanding. And its business has proved particularly sensitive to the current market environment. However, for investors who like Amazon and Tesla, simply buying a consumer discretionary index fund is a great fit that achieves a concentration in these two core holdings and then added diversification and exposure with other top stocks.
Another benefit of the fund is that it is larger, with around $14 billion in net assets. That size, combined with the fact that it is managed by State Street Global Advisors, allows the fund to have just a 0.1% expense ratio -- which is hard to beat.
The ideal fund for environmentally focused investors
The Clean Edge Green Energy fund is ideally suited for investors interested in the energy transition. Tesla is the third largest holding with an 8% weighting.
This fund is very different from the consumer discretionary index fund because there's a diverse blend of industry leaders and start-ups. There are also plenty of small-cap companies in the fund. And even the top holdings, like ON Semiconductor or Enphase Energy, are far less established than a company like Home Depot or Starbucks.
For that reason, the Clean Edge Green Energy fund is quite a bit riskier than a consumer discretion index fund. It also has far fewer assets at around $1.7 billion and a higher expense ratio of 0.58%. However, if investing in Tesla stems from an interest in electric vehicles (EVs), solar energy, and alternative fuels, the Clean Edge Green Energy fund could be the best fit.
The fund for high risk/high reward stocks
Cathie Wood's Ark Innovation is one of the most newsworthy ETFs. And with $7.5 billion in assets, it is one of the largest actively managed ETFs. Tesla is the fund's largest holding, with a 10.2% stake. Other top holdings include Zoom Video Communications, Roku, and Coinbase Global.
The fund has been making headlines for all the wrong reasons over the last couple of years. After being a Main Street darling, it is now down a staggering 75.9% from its all-time high. And a lot of the reason is that the fund is invested almost entirely in growth stocks.
Many of its holdings are companies that are either barely profitable, inconsistently profitable, unprofitable, or are valued at a high multiple relative to their profits. For that reason, these stocks are particularly susceptible to a stock market sell-off.
Despite being a large ETF, the fund has a high expense ratio at 0.75%, which is about as high as you'll ever see for an ETF. And a core reason for that is because the fund tends to make several trades every day, if not dozens. Charging a price for its active management makes sense, but you could argue that the fund is overly managed. For that reason, some investors may prefer a more passively managed fund.
Three different ways to build around Tesla
Each fund offers a unique way to invest in the EV maker.
The Consumer Discretionary Select Sector SPDR Fund invests in companies that have a similar size, market dominance, and brand power as Tesla even if they serve completely different industries.
The Clean Edge Green Energy fund invests in companies that are addressing similar challenges as Tesla is.
Lastly, the Ark Innovation ETF invests in high-risk stocks with high potential reward (like Tesla) that demand high-risk tolerance from investors.
For this reason, the consumer discretionary fund might be the best choice for risk-averse investors who view the EV maker as one of the riskiest stocks they want to own. The Clean Edge Green Energy fund is a good fit for those specifically interested in clean energy. And the Ark Innovation ETF is best for those that want stocks like Tesla, not necessarily companies like Tesla.
