IDRV ETF: Differentiating between short-term and long-term opportunities (NYSEARCA: IDRV)

gorodenkoff/iStock via Getty Images

Investment thesis

In my last article on the iShares Self-Driving EV and Tech ETF (NYSEARCA:IDRV), I expressed some skepticism about the expected future returns of IDRV and concluded that they are likely to be significantly different from past returns. Additionally, I highlighted the fact that IDRV was relatively expensive (the fund was trading at over 20x earnings) and that volatility would be a key feature in the short term. Since then, IDRV has lost ~31% vs. a ~22% loss for the S&P 500 and has underperformed the US market.

In the higher rate environment, I believe it is crucial for investors to distinguish between the short and long term benefits of holding this fund. Self-driving technology is not yet in the mass adoption phase and companies are unlikely to see an immediate return on their investment. This becomes costly in a rising rate environment, and we could see companies prioritizing already profitable projects. Finally, I think it’s important for investors to understand that IDRV invests nearly 50% of its assets in cyclical industries such as automakers. Given the higher odds of a recession in the next two months, investing in cyclical stocks can exacerbate your portfolio’s downside and volatility if the economy turns south.

What has happened since my last post

As a reminder, the iShares Self-Driving EV and Tech ETF tracks the performance of the NYSE FactSet Global Autonomous Driving and Electric Vehicle Index, which provides exposure to stocks in both developed and emerging markets that are likely to benefit from growth and innovation in and around electric vehicles, battery technologies and autonomous driving technologies. Below is a recent breakdown of the top 10 holdings, and you can read more about the strategy in my previous article.

IDRV funds

the morning star

Below I have compared the price performance of IDRV against the Global X Autonomous & Electric Vehicles (DRIV) ETF and the SPDR S&P 500 Trust (SPY) ETF over the past 6 months to determine which was the best investment. Since my previous article, IDRV has lost ~30% and against a loss of ~21% and ~27% for SPY and DRIV, respectively. Interestingly, IDRV performed worse than DRIV despite having a similar strategy and portfolio. I believe this is due to the way IDRV’s wallet is constructed. DRIV’s top 10 holdings represent only 29% of the portfolio, compared to IDRV which invests more than 40% of assets in the top ten positions.

IDRV ETF Price

Refinitiv Eikon

Despite the abysmal returns, investors remain bullish on IDRV. The fund has seen nearly $53 million in inflows since the end of December 2021, showing that investors are buying the dips in hopes of picking up a bargain. Seeing repeat entries despite a 30% drawdown illustrates a lack of capitulation and more broadly, it reinforces my hypothesis that we are not yet close to bottom.

IDRV Funds Flow

ETF.com

Differentiate between short-term and long-term opportunities

Autonomous vehicles have attractive long-term growth prospects, which should make every investor pay attention to this emerging trend. Recent estimates predict that more than 30 million autonomous vehicles will be sold by 2040. Although the biggest gains are expected after 2030, several OEMs have announced commercial market entry for 2021/2022. The revolutionary potential of this technology has prompted traditional OEMs and software companies to increase their investments in order to win the technology race. As the Covid-19 pandemic has reduced the pace of spending, cumulative investment in this technology is expected to reach nearly $90 billion by 2024.

Autonomous vehicle investment

FinancialTimes

However, the technology has yet to reach mass adoption, which still makes it unprofitable given the amount of investment needed to develop it. Recent estimates suggest that the widespread deployment of safety driverless autonomous driving systems will take at least a decade, while expansion will most likely be gradual and region-by-region in specific transportation modes. There are currently few examples of commercial adoption on a smaller scale. Waymo One is one of the few commercial ride-sharing services in Phoenix, Arizona that offers fully self-driving rides.

Not generating positive cash flow becomes an important issue in this market environment where liquidity is rapidly drying up. The market is now beginning to accurately reprice some of the loss-making companies/techs, especially in the credit market, where credit spreads between junk and investment grade bonds have widened significantly over the past two months. I think higher rates will push companies to prioritize profitable projects that have the ability to generate money today.

US liquidity cycle

Cross-border capital

I think it’s increasingly important for investors to consider what the potential risks are over the next 18 months. In my opinion, the probability of having a recession in the United States is now much higher than six months ago, which should encourage you to reconsider investing in cyclical stocks. Nearly 50% of IDRV’s assets are invested in cyclical industries, including automakers and commodity suppliers. These are the sectors that have seen some of the biggest pullbacks so far this year and will likely continue to underperform when the economy turns down.

IDRV sectors

the morning star

Although the market has readjusted prices to reflect higher risks, I think we are still a long way from a bottom for equities given that earnings estimates are unchanged. In other words, I expect the next leg down to be driven by lower earnings revisions stemming from poor economic conditions. Some leading indicators are starting to turn red, which should worry investors at this stage of this cycle as the Fed proceeds with quantitative tightening. I think the next 12 months will be extremely volatile and downside risks from current levels continue to be the primary concern for me.

New orders expected in the Philadelphia Fed manufacturing sector

The DailyShot

Key points to remember

In the face of rising interest rates, I think it’s critical that investors distinguish between the short-term and long-term benefits of owning IDRV. While the long-term picture comes with an attractive outlook, we are still in the early stages of self-driving today, and companies are unlikely to see an immediate return on their investment. In a rising rate environment, this becomes costly and companies may prioritize projects that are already profitable. Finally, I think it’s critical that investors understand where we are in the economic cycle and how that might impact IDRV. The fund invests nearly half of its assets in cyclical industries such as automakers. If you think the risks of recession are real, I personally think it’s best to avoid cyclical stocks as they generally tend to increase portfolio volatility, as well as drawdown.

Comments are closed.