Tesla Battery Pivot Sparks ETF Rotation: America In, China Out?

Tesla Inc.’s TSLA new $4.3 billion battery agreement with South Korea’s LG Energy Solution is a sweeping gesture toward reshoring battery making.

With the production of lithium iron phosphate (LFP) batteries in Michigan, Tesla is essentially dimming the lights on China’s battery behemoths (say hello to CATL and friends), according to a Reuters report. This switch has far-reaching implications for ETFs seeking to capitalize on the global trends in clean energy and manufacturing.

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The ETF Angle

U.S. Clean Energy & Domestic Manufacturing ETFs:

Tesla’s new agreement focuses on domestic manufacturing, setting up U.S.-focused clean energy and manufacturing ETFs to gain from enhanced investor optimism about “Made in America” supply chains.

Examples are iShares U.S. Clean Energy ETF ICLN: With exposure to the companies that are set to gain from the incentives of the Inflation Reduction Act, ICLN-style ETFs may experience inflows as the story turns toward domestic manufacturing.

First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund GRID: As Tesla increases domestic battery production, associated sectors (such as smart grid infrastructure) may be considered complementary victors.

South Korea & Global Clean Tech ETFs:

South Korean-based LGES is a main player in this unfolding story. ETFs with international clean tech holdings may benefit from a growing profile of South Korean battery manufacturers.

Example: KraneShares Electric Vehicles and Future Mobility ETF KARS: With high exposure to EV technology across the world, including top players from Asia, KARS could seize part of the upside when LGES becomes the focus.

China-Focused Clean Energy ETFs: In a Headwind?

ETFs that previously relied on China’s battery leadership could be in for a chill as Tesla’s strategy funnels cash into non-Chinese providers. China-dominant ETFs could be rebalanced by investors, who may now prefer funds that focus on geopolitical risk minimization.

Example: KraneShares MSCI China Clean Technology Index ETF KGRN: With less exposure to Chinese battery output, money loaded with Chinese EV and battery stocks could experience subdued gains or even volatility in the short term.

The Forces Behind The Shift

Supply Chain Strategy: Tesla’s move is motivated by a desire to hedge against trade risks and take advantage of beneficial domestic policies, such as the Inflation Reduction Act that includes tax credits for on-shore production. U.S. policy-sensitive ETFs (the domestic clean energy or manufacturing ones) might be the actual winners here.

Policy and Tariff Impact: By diverting from Chinese suppliers, Tesla avoids possible tariffs and trade uncertainty, a clever hedge that investors may find replicated in ETF rebalancing. Look for a rotation into an ETF to take effect as funds loaded with Chinese exposure get reduced in favor of those that have more stable, U.S. or diversified international exposures.

Long-Term Trends: Aside from short-term volatility, this shift suggests a world going forward where global EV supply chains are more balanced. ETFs that reflect this larger trend may present a more solid investment thesis.

Conclusion

ETF managers, investors and financial analysts might rethink their holdings in a global arena where geopolitics, policy rewards and supply chain tactics are all increasingly coupled. And with Tesla throwing some disruptor spice into the mix, this isn’t quarterly results, it’s a wake-up call for fund managers everywhere.

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Photo: Courtesy Tesla Inc.