Once an investor darling, Tesla’s stock has taken a dramatic nosedive in 2024, plummeting over 37% year-to-date. This makes it the second worst performing stock in the S&P 500 index, trailing only insurance company Globe Life. For investors holding Tesla in their portfolios, the severe share price decline poses a major dilemma – should they hold or fold on the electric vehicle pioneer?
Despite its struggles, Tesla retains an imposing $500 billion market capitalization, giving it an approximate 1% weighting in the benchmark S&P 500 index. In sector-specific funds, Tesla’s presence is even more pronounced – it accounts for a hefty 12% allocation in the Consumer Discretionary Select Sector SPDR ETF (XLY) and around 10% of Cathie Wood’s ARK Innovation ETF (ARKK).
“Reducing exposure to an individual stock like Tesla is possible but not straightforward,” cautions Todd Rosenbluth, head of research at investment research firm VettaFi. “There are ways to mitigate the impact, but they each come with their own set of trade-offs.”
Shifting Sector Exposures
For investors looking to maintain exposure to the consumer discretionary sector while reducing their Tesla risk, Rosenbluth suggests considering the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RSPD). By equally weighting its holdings, RSPD limits any single stock’s influence, allocating around 2% to each position including Tesla.
“You cut your Tesla allocation by about 10 percentage points compared to XLY,” says Rosenbluth. “But you also reduce your exposure to mega-caps like Amazon that drive more of XLY’s performance.”
Single-Stock Hedge Options
Another tactic is using inverse ETFs that move opposite to an individual stock. The recently launched Direxion Daily Tesla Bear 1X ETF (TSLS) aims to deliver the inverse daily return of Tesla shares through options strategies.
“TSLS could be paired with a broad S&P 500 ETF to neutralize Tesla’s impact,” explains Rosenbluth. “But inverse ETFs carry elevated risks since stocks can rally for extended periods, not to mention high fees.”
The AXS Short Innovation Daily ETF (SARK) provides another avenue for betting against Tesla’s price movements. SARK is designed to move inversely to Cathie Wood’s ARK Innovation ETF, one of the largest holders of Tesla stock. While delivering a positive 18% return so far this year, SARK charges a 0.75% expense ratio.
Defensive Income Strategies
For a lower-risk approach, Rosenbluth suggests exploring covered call strategies on Tesla shares. The recently launched KraneShares Kure Yield Premium Strategy Tesla ETF (TSLP) holds a portfolio of Tesla stock while selling call options to generate income.
“Funds like TSLP provide a more defensive way to earn yield from your Tesla position as the stock declines,” says Rosenbluth. “But again, you’re paying up with a 0.99% fee.”
Don’t Panic
For investors with broad index fund exposure through S&P 500 ETFs, Tesla’s tailspin may not require any action. Given its 1% weighting, the electric car maker’s impact is relatively contained within a diversified portfolio.
“One benefit of S&P 500 ETFs is that your single stock risk like Tesla is minimized and offset by other quality companies,” notes Rosenbluth. “In a cap-weighted index fund, Tesla’s impact is proportional and arguably less consequential than in other sliced products.”
As Tesla’s journey continues to captivate investors, from its disruptive innovation to its eccentric billionaire leader Elon Musk, managing exposure will remain a key consideration. For some, it may be prudent to trim or hedge their holdings, while others may choose to ride out the volatility as part of a diversified core portfolio.
