Tesla Stock Plunged 15% Last Week. Here's a Safer Way to Buy Electric Vehicle Stocks.

According to Bloomberg's New Energy Finance division, demand for electric vehicles (EVs) will explode in the coming years. The company estimates 730 million passenger EVs could be on the road by 2040, and considering that less than 8 million were sold in 2022, there will have to be a rapid acceleration in uptake to meet the forecast.

The global leader in pure EV sales is Tesla (TSLA -4.95%), and despite plans to rapidly expand, even that company has an annual production capacity of only around 2.3 million vehicles right now.

Image source: Tesla.

Tesla stock has recently lost its spark

Tesla stock sank 15% last week after reporting results for the third quarter (ended Sept. 30). Investors are concerned about growing competition from both start-ups and legacy automakers entering the EV space, combined with a sluggish economy that has put the brakes on consumer demand. 

To combat those pressures, Tesla has leaned on its industry-leading gross profit margin to slash the price of its EVs by almost 20% since August 2022. The move has buoyed sales, and the company believes it will meet its annual production target of 1.8 million vehicles this year as a result. But it will come at the expense of much slower revenue growth and shrinking earnings per share, which is forcing investors to reconsider the company's valuation.

Last week's drop in its share price piled onto what is now a 47% decline from its all-time high. Tesla has substantial opportunities ahead with technologies like autonomous driving on the horizon, and I absolutely believe the recent weakness is a great opportunity to buy its stock for the long term.

However, there's no ignoring the volatility that comes with owning a slice of Tesla, and it might not be suitable for all investors. There could be a better way to play the EV revolution for those with a lower risk tolerance.

An exchange-traded fund might be the answer

Exchange-traded funds (ETFs) are designed to give exposure to a specific segment of the stock market in a clean and simple way. An ETF can hold a portfolio of dozens of stocks -- or even hundreds -- neatly packaged into one security. So instead of buying a basket of individual EV stocks, investors can buy one or two ETFs and (theoretically) yield a similar result.

The Global X Autonomous & Electric Vehicles ETF (DRIV -1.41%) has 76 holdings in its portfolio, exposing investors to several facets of the EV industry:

• It owns a stake in several EV manufacturers, including Tesla, Ford, General Motors, and Nio, to name just a few.
• It has a stake in several companies in the EV supply chain, including lithium miners and semiconductor producers around the world.
• And it includes leading artificial intelligence (AI) companies like Alphabet and Nvidia, which are working on autonomous vehicle technologies.

The Global X Autonomous & Electric Vehicles ETF is a great choice

Investing in emerging technologies like EVs and autonomous driving can be risky. Long-term growth rarely occurs in a straight line, hence the substantial decline in Tesla stock from its all-time high. While the company is in a fantastic financial position and will likely thrive in the future, many of the companies trying to tackle these industries won't be so fortunate.

As a result, trying to pick individual winners and losers can lead to catastrophic financial losses for investors. The Global X ETF limits some of those risks because it's so diversified. Plus, its top 10 holdings account for 30.4% of the total value of its portfolio, and they are dominated by well-known companies with established track records:

Data source: Global X ETFs. Weightings as of Oct. 22.

The Global X ETF has delivered an average annual return of 9.9% since its inception in 2018, roughly in line with the average long-term return of the benchmark S&P 500 index. But keep in mind that the EV and autonomous driving industries are still in their early stages. Should EV adoption ramp up like Bloomberg expects, this ETF could outperform the broader market long into the future.

But while the Global X ETF likely carries less risk than owning a handful of individual EV stocks, it isn't risk-free. Its holdings are highly concentrated, which means any blanket issues like government regulation for electric and autonomous vehicles could send most stocks in its portfolio heading south.

That would be bad news for the ETF, although holdings like Alphabet, Apple, and Nvidia have powerful businesses outside of those industries, which should help prop up the ETF in that situation.

Again, investing in emerging technologies will always carry risk. But the Global X Autonomous & Electric Vehicles ETF is a great way to limit that risk while still owning a share of all the major drivers of these new industries.