Tesla Motors Inc (TSLA) Fires Hit Lithium ETF

Tesla Motors Inc (TSLA) Fires Hit Lithium ETF

Tesla Motors (TSLA), which was one of the hottest stocks this year, has recently been hit hard by disappointing third quarter results and three Model S fires. In fact, shares of the electric car manufacturer plunged nearly 38% since the start of October, suggesting that the stock has entered into a bearish territory.

Sluggish Third Quarter Result

While Tesla surpassed the Zacks Consensus Estimate on revenue, it missed on the bottom line. The company is also facing a shortage of lithium ion batteries, which is limiting its production capacity (read: 2 ETFs to Watch on Tesla’s Mixed Earnings).

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Although the company has increased its production capacity to 550 cars per week and has delivered a record 5,500 Model S cars during the third quarter, it is still failing to meet the rising demand. This trend is expected to continue, as Tesla won’t get significantly higher number of batteries until next year, according to its deal with supplier Panasonic.

Tesla Fire Raises Lithium Battery Issues

The first Model S electric vehicle fire caught near Seattle early October when the car collided with a “large metallic object”. The second fire ignited later in the month after the vehicle crashed through a concrete wall and hit a tree in Merida, Mexico.

The third incident occurred in Nashville in early November after a car hit road debris. Investors should note that Model S is equipped with lithium ion batteries, which are at the heart of the electric car revolution. (read:These 3 ETFs Could Soar on Strong Car Sales).

Other Factors

While this is not enough, other big companies like Boeing (BA), General Motors (GM), Apple (AAPL) and Dell (DELL) are also struggling with lithium battery issues in recent years, according to the 24/7 Wall Street.

As such, the recent Tesla fires have increased concerns on the safety of lithium batteries, putting both producers/miners of lithium as well as those that make and sell the final battery product, in trouble.

This is especially true given that the broad play in this space – Global X Lithium ETF (LIT) – is down nearly 6% since the start of October and nearly 12% in the year-to-date period. Let us dig into this fund in greater detail below:

Lithium ETF in Focus

The product provides global exposure to the broad range of firms engaged in the mining of lithium, or the development of lithium batteries. This is done by tracking the Solactive Global Lithium Index giving access to the largest and most liquid 22 firms around the globe.

American firms dominate the portfolio with 53% share while Japan, South Korea and Chile round off to the next three spots with single-digit allocation. From a sector look, the ETF is heavy on materials with 56% share, closely followed by consumer cyclical (17%) and industrials (14%) (see: all the Material ETFs here).

The fund is highly concentrated on the top two American firms – FMC Corp (FMC) and Rockwood Holdings (ROC) – which collectively make up for nearly 38% of total assets. Other firms hold less than 6.6% of assets.

Additionally, the product has a slight tilt toward mid cap securities, accounting for nearly half of the portfolio. The remainder is split between mid and small caps (read: 3 Top Ranked Mid Cap Value ETFs in Focus).

The fund has amassed $50 million in its asset base and trades in light volume of nearly 23,000 shares per day. This increases the total cost for the fund in the form of a wide bid/ask spread beyond the expense ratio of 0.75%.

Bottom Line

Like many other commodity funds, LIT is facing severe losses and has been struggling for much of 2013. Given broad-based lithium battery issues at least for the short term, investors should avoid this ETF for the time being and should look elsewhere in the commodity prouder space.

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GLBL-X LITHIUM (LIT): ETF Research Reports

TESLA MOTORS (TSLA): Free Stock Analysis Report

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