Tesla Gets Downgrade: Why EV ETFs Might Be Your Smart Pivot

Morgan Stanley’s Recent Move & What It Means

On December 8, 2025, Morgan Stanley cut Tesla’s rating from Overweight to Equal Weight, slashing the price target to $425. The reason? The stanley analysts believe Tesla’s current valuation already bakes in aggressive assumptions around AI, robotics, and Full Self-Driving tech—while traditional EV growth is cooling faster than expected. Naturally, Tesla stock dipped 3% following the announcement.

But here’s the thing: Tesla still dominates the U.S. EV market with a commanding 41% share as of Q3 2025. Yet even dominance isn’t invincible anymore.

The Real Problem Behind the Numbers

Morgan Stanley’s forecast is pretty stark—they’re projecting Tesla’s delivery volume will shrink 10.5% next year and drop 18.5% cumulatively through 2040. Why the sharp revision? Tesla’s grip on the global EV market is slipping, especially in China where local competitors like BYD are eating into market share aggressively.

Here’s what makes this interesting though: Elon Musk himself has signaled the company is pivoting away from EVs toward humanoid robots and AI-driven services. That’s not a threat to the EV revolution—it’s Tesla’s own strategic shift. For investors betting on the electric vehicle boom itself, this raises a critical question: should you be in Tesla stock or in the broader EV sector?

The Bigger Picture: EVs Aren’t Slowing Down

While Tesla faces headwinds, the global EV market is accelerating. Battery electric vehicle sales across major markets surged 35% year-over-year in Q3 2025. Even more telling: traditional automakers like General Motors and Volkswagen posted EV sales growth exceeding 100% in the same period.

Gartner projects 116 million EVs globally on the road next year—a solid 30% annual jump. This tells you the EV revolution has moved beyond any single player. It’s now an industry-wide transformation.

Where Zero-Emission Technology Is Heading

The shift toward zero-emission mobility is creating winners across the entire supply chain—not just car manufacturers. Battery makers, lithium suppliers, semiconductor producers, and infrastructure builders are all riding this wave. This is precisely where EV ETFs shine.

Three ETFs Worth Your Attention

KraneShares Electric Vehicles & Future Mobility ETF (KARS) With $80 million in assets, KARS holds 46.8% gains year-to-date by tapping into EV production, autonomous tech, lithium mining, and battery manufacturing. Top holdings include Contemporary (4.90%), Tesla (4.70%), and Panasonic (3.98%). The fee is 72 bps.

State Street SPDR S&P Kensho Smart Mobility ETF (HAIL) This $21.5 million fund gives you 79 companies driving smart transportation innovation. Holdings span optical tech suppliers like Lumentum (3.83%), hydrogen fuel cell makers like Ballard Power (2.26%), and zero-emission tech providers. HAIL is up 22.8% year-to-date with 45 bps in fees.

iShares Self-Driving EV and Tech ETF (IDRV) At $169.8 million in assets, IDRV tracks 46 companies leading self-driving and EV breakthroughs. Key holdings include lithium suppliers Albemarle (6.63%) and PLS Group (4.21%), plus EV maker Rivian (3.92%). The fund returned 33.1% YTD with 48 bps fees.

The Bottom Line

Tesla’s downgrade isn’t a red flag for the EV market—it’s a wake-up call to diversify. The stanley-led analysis actually validates what EV ETFs offer: exposure to the entire ecosystem, not betting everything on one stock’s ability to deliver AI breakthroughs. With the EV revolution clearly becoming industry-wide and zero-emission adoption accelerating globally, a diversified ETF approach gives you the upside without the single-stock volatility.