Is This ETF a Safer Way to Buy the Dip on Tesla and Rivian Stock?

Electric vehicle (EV) stocks like Tesla (TSLA -1.11%) and Rivian Automotive (RIVN 6.10%) have been under pressure lately, falling 16.5% and 20.5%, respectively, over the last three weeks.

Tesla's third quarter earnings missed Wall Street expectations. Meanwhile, Rivian has suffered collateral damage from the broader EV industry selling off. But it also did a capital raise through a convertible bond offering to bolster its already strong balance sheet, which potentially dilutes the value of Rivian stock.

An exchange-traded fund (ETF) can be the perfect way to invest in the growth of a broader industry while reducing the firm risk that comes with over-allocating into a single company. Put another way, an ETF does the diversification work for you while still providing a significant amount of exposure to industry leaders.

Tesla is the second-largest holding in the First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN 1.78%), and Rivian is the fourth-largest holding. Here's why both stocks are under pressure, and why buying the ETF may be a good way to gain exposure to both companies as well as other beaten-down EV and renewable energy stocks.

Image source: Getty Images.

Tesla's margin story is losing its luster

The auto industry is capital intensive, cyclical, and highly competitive. For those reasons, auto stocks tend to fetch discounted valuations compared to the market. But Tesla is an exception.

Its breakneck growth rate, combined with its high operating margin (at least until recently), are valid reasons Tesla deserves to trade a premium to the industry. And if you believe that EVs will continue to take market share from internal combustion engine vehicles, then Tesla has the added advantage of being an established and profitable market leader while most of the industry is still playing catch-up.

The investment thesis for Tesla loses steam if any of these advantages show weakness. Unfortunately, we are seeing all come under pressure. Despite repeated price cuts across its product offering, Tesla's growth rate on its core auto business has slowed. The price cuts have hurt Tesla's margins, which came in at just 7.6% in Q3 2023. For context, Tesla's operating margin in 2022 was 17% and 12.1% in 2021.

Tesla's growth is largely dependent on China. China's economy has its own challenges. But maybe the bigger threat to Tesla is mounting competition from companies like BYD Company Limited (OTC: BYDDY) that have designed inexpensive, high-quality cars specifically tailored to the preferences of the Chinese market.

Tesla is an incredible company. But its long-term production growth targets depend on expanding its global manufacturing footprint. To do that, Tesla needs to generate plenty of extra income to plough back into the business. The more the operating margin ticks down, the less dry powder Tesla has to power future growth.

Of course, Tesla can't control the business cycle. But investors need to understand that a decline in its short-term performance also slows down its pace of growth, which leaves Tesla more vulnerable to losing ground to competition. Growth and scale are primary ingredients in Tesla's long-term investment thesis. Near-term challenges also affect the pace of its growth, and in turn, can put pressure on Tesla's valuation.

Rivian is about to enter its next growth phase

Rivian has done an impressive job of hitting its production and delivery targets. Its biggest challenge is its cash burn. Rivian isn't profitable. So it has to fund its operations and capital investments with cash on its balance sheet.

Rivian remains in a race against the clock to lower its cash burn and reach profitability while diluting its stock as little as possible in the process.

Like Tesla, Rivian has big plans to boost its manufacturing capacity. On Oct. 20, Rivian announced the opening of its Ponce City Market showroom in Atlanta. The store will highlight Rivian's Georgia manufacturing facility, which will have an annual production capacity of 400,000 units. Rivian said it expects to hold a groundbreaking ceremony and begin construction in early 2024.

The manufacturing plant is essential for Rivian if it is to scale production and reach profitability. But it will also be expensive, accelerate Rivian's cash burn, and leave it more vulnerable to challenges.

Achieve diversification and growth potential with the Clean Edge Green Energy Fund

Investors who believe in the future of clean energy, EVs, and the energy transition may want to consider the Clean Edge Green Energy Fund as a foundational holding. The fund has plenty of exposure to a variety of semiconductor companies, solar energy companies, utilities, operators, technology companies, and real estate plays. Here's a look at the fund's top 15 holdings, which make up 68.2% of the fund.

Data source: First Trust.

An investment in an ETF like the Clean Edge Green Energy Fund is a bet on broad industry trends, not so much particular companies. It's an easy way to invest in the nuts and bolts and the supply chain of the industry instead of being overly reliant on consumer-facing companies.

With 64 holdings, a 0.58% expense ratio, $1.23 billion in net assets, and a 16-year track record, the fund is a diversified, fairly inexpensive, and credible way to invest in the energy transition and a good way to boost exposure in Tesla and Rivian.

One of the best ways to invest in the energy transition

Tesla and Rivian have their challenges -- but so do many of the other companies in the industry. This is understandable given the tightness in capital markets, muted investments from venture capital, and high interest rates.

One of the best arguments against investing in the energy transition is that it features an uncertain timeline and there could be sizable losses before eventual returns. That's certainly the case for an unprofitable EV company like Rivian. But many of the holdings in the Clean Edge Green Energy Fund are already profitable.

Two good examples are On Semiconductor, which makes chips, and Albemarle, a company that mines and supplies lithium used to make lithium-ion batteries for the EV industry. On Semiconductor is guiding for slowing growth but is still highly profitable. The same goes for Albemarle. However, both stocks have already sold off big time -- down over 34% in the last three months. And that's a common theme throughout many of the top holdings in the fund -- that they are profitable established companies that benefit from the energy transition but can still be successful even if there is a multi-year slowdown. Investing solely in automakers like Tesla and Rivian simply doesn't give investors nearly as much stability as the Clean Edge Green Energy Fund.

The Clean Edge Green Energy Fund is down 26.7% year to date and just reached a fresh three-year low on Oct. 27 -- making now a good time to take a closer look for investors who don't mind volatility and are willing to let the multi-decade themes play out.