Funds and etfs

Investors May Want to Bet on Lithium Rather than Tesla

Tesla Inc. (NASDAQ: TSLA) has drawn a lot of criticism from investors following its decision to acquire SolarCity Inc. (NASDAQ: SCTY). According to Morgan Stanley’s Adam Jonas, a historically bullish analyst when it comes to the electric car company, the deal could strain Tesla’s financial and human resources, increase its cash consumption, and is riddled with potential conflicts of interest since Solar City CEO Lydon Rive is Tesla CEO Elon Musk’s cousin.

As if the SolarCity deal wasn’t bad enough, the U.S. Securities and Exchange Commission is reportedly examining Tesla to see if it breached securities regulations and laws by not disclosing to investors the death of a Tesla Model S owner that was likely linked to its autopilot feature. Tesla supporters are quick to note that automakers like Ford Inc. (NYSE: F) aren’t required to disclose every death, but nevertheless, it’s a cloud over Tesla’s stock.

Most Tesla investors are buying the stock based on the promise of a mass market electric vehicle that’s coming in the form of the Model 3 – a newly announced vehicle that has drawn nearly a half million preorders. If successfully launched, the new car could transform the automotive market by bringing high performance characteristics to an affordable mass market vehicle – no easy feat but seemingly attainable for the talented Elon Musk.

Investors looking to sidestep concerns over Tesla in particular may want to consider buying into the core commodity underlying the move to electric vehicles – lithium.

The Global X Lithium ETF (NYSE ARCA: LIT) is trading up more than 25% so far this year and more than 40% over the past six months. By comparison, Tesla’s stock is trading up down nearly 8% so far this year and is trading up just 10% over the past six months. The ETF has significantly grown its assets under management from less than $40 million at the end of 2015 to more than $75 million today, suggesting robust investor demand for the commodity.

Lithium is a core component to the batteries that will underlie the enormous demand for electric vehicles if the Model 3 is successful. At the same time, over 60% of lithium demand comes from industrial applications like glass, ceramics, lubricants, and casting powders, which means that demand for the commodity is diversified well-beyond batteries. Electric vehicles could eclipse this demand with each Model S using as much lithium as 10,000 smartphones.

The lithium industry has also contributed to the potential for significant price movement. With only a handful of large global producers, the industry is relatively concentrated compared to other industrial metals. Goldman Sachs analysts have called lithium “the new gasoline” and many large producers have been scrambling to increase supply amid the heightening demand from a variety of consumers around the world.

In the end, investors may want to consider adding lithium as an alternative to buying equities like Tesla – or at least as a diversification away from pure equity exposure – particularly amid the uncertainty surrounding the company’s direction at the moment.