XLY: Profit from Tesla the ETF Way With Less Volatility and Dividends

Given its share price of $1140 after a 500% surge, there are questions as to whether this valuation really reflects the real potential of the company.


Source: cnbc.com

While Elon Musk’s company has key strength attributes which differentiate it as a leading electric vehicle (EV) manufacturer, the stock’s volatility should persist due to the “high-profile” nature of its CEO, the fact that it is a grown name, as well as exposure to the cryptocurrency world. For this purpose, the EV play’s beta of 1.38 is high. Now, beta is a measure of a stock’s volatility compared with the overall market or the S&P 500 which comes with a value of 1.

For those wishing to profit from Tesla without suffering from the volatility as well as get some dividends along the way, there is the ETF route, but since there are many funds holding the popular company as part of their assets, it is important to choose the right one. For this purpose, etf.com provides a list of ETFs with the most Tesla exposure consisting of the Consumer Discretionary Select Sector SPDR ETF (XLY), Simplify Volt RoboCar Disruption and Tech ETF (VCAR), ProShares Ultra Consumer Goods ETF (UGE), and the Vanguard Consumer Discretionary ETF (VCR). There are others as well, but these are the top four.

Next, I extracted data pertaining to the one-year growth and volatility for each ETF from fxempire and MorningStar respectively before adding the expense ratio metric which includes the management fees charged by the fund managers.

Looking at the chart below, XLY, VCAR, and UGE as shown in pale blue have the highest exposure to Tesla at 18.70%, 18.68%, and 18.60% respectively. This is followed by VCR which includes 15.01% of Tesla’s shares in its portfolio. The latter also incurs the least expenses, at a ratio of only 0.10% (shortest red chart), and boasts the highest dividend yield at 0.75%. However, it exhibits a one-year growth of only 23% as shown in the purple chart below, which is less than half of what has been achieved by Tesla during the same period.


Source: Prepared by author.

Conversely, for those who are anemic to volatility, the most suitable ETF is VCAR with a beta of 0.82 (shortest green chart above). On the other hand, the ETF has the highest expense ratio at 1.08% (tallest red chart) and the worst one-year growth at 18.52%. Pursuing further, UGE, with its superior one-year growth of over 42% but highest volatility (beta of over 2), exceeding even Tesla’s should be avoided, unless you are adept at growth.

Thinking rationally, the ETF offering the best balance between ownership, expense ratio (0.12%) and volatility (with a beta of 1.3 or less than Tesla) is XLY. This SPDR ETF also offers a dividend yield of 0.52% and its 27.16% one-year growth is equivalent to 54% of what was offered by Tesla at 49.76%.

Finally, unless you are a big investor, choosing the ETF option for a stock like Tesla circumvents the need to buy a fractional share or a slice of the stock. This type of trade is not necessarily offered by the mainstream brokers and you may incur more commissions than normal. This said, offering sky-high potential, Tesla’s stock is on a wild ride, but it still deserves a spot in your portfolio, and to this end, choosing XLY does make sense.