Tesla's Sharp Drop Sends Shockwaves Through These ETFs

Tesla Inc.‘s TSLA stock is facing a sharp decline, and ETFs with significant exposure to the EV giant are experiencing pressure. With declining European sales, earnings below expectations, and scrutiny on CEO Elon Musk's leadership, Tesla’s challenges are impacting many ETFs and testing investor confidence.

Leveraged ETFs have taken an especially hard hit. For instance, the Simplify Volt TSLA Revolution ETF TESL has tumbled 44% since Dec. 17, 2024, when Tesla last peaked.

While leveraged products are seeing the most dramatic swings, broad-market and sector ETFs with significant Tesla holdings are also feeling the pain. Here are some of the hardest-hit funds:

Vanguard Consumer Discretionary ETF VCR has tumbled 12.2% since Dec. 17. The ETF has a 17.30% weighting in Tesla.

With a 15.9% weighting in Tesla, Nightview Fund NITE NITE has been affected by Tesla's recent decline. The ETF has fallen 10.3% during the same period.

Consumer Discretionary Select Sector SPDR Fund XLY has allocated 13.32% of its assets under management to Tesla. This ETF has seen an 11.3% decline since the EV maker’s December peak.

Another group facing the fallout? Investors in South Korea, who have heavily bet on leveraged Tesla products. According to Bloomberg News, Korean investors were the largest holders of the Leverage Shares 3x Tesla ETP, a product designed to deliver three times Tesla's daily returns. The catch? The ETP has lost more than 80% since its December high, mirroring Tesla's 41% plunge over the same period. The losses have prompted local brokerage Mirae Asset Securities Co. to suspend orders for some of the riskiest leveraged ETPs.

What's Driving Tesla's Decline?

Shares of Tesla have fallen roughly 40% from their late 2024 high, including a 17% drop this week. The downturn comes as Tesla faces declining European sales, earnings below expectations, and investor concerns over CEO Elon Musk's political involvement. The broader market has also been under pressure.

What's Next for Tesla And Affected ETFs?

For now, catalysts for a Tesla turnaround appear scarce. Analysts don't expect any major updates on its fully self-driving vehicle plans soon, and competition is heating up, said another report by Bloomberg. China's BYD Co. recently announced it would offer advanced driver-assistance features on nearly all future models at no extra cost.

The significant overvaluation of the stock is another worry. Tesla is trading at 95.24 times forward earnings (per Benzinga Pro data), far above the S&P 500's 21x average, and this is keeping investors cautious. Options traders are also bracing for more downside, as they are now paying the highest premium for protection against further declines since last August's market rout, noted Bloomberg.

Still, Tesla has a history of defying expectations. As David Mazza, CEO of Roundhill Financial, told Bloomberg, "We expect Tesla to remain under near-term pressure as investors weigh the benefits of Musk's ‘First Buddy' premium with the reality of their EV business struggling in strategically important markets."

Read Next: