California is looking to require that electric vehicles be the only new ones sold in the state in the future, an ambitious agenda that carries with it implications for exchange traded funds like the famed ARK Innovation ETF (NYSEArca: ARKK).

“Companies within ARKK include those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to the areas of DNA technologies (‘Genomic Revolution’), industrial innovation in energy, automation, and manufacturing (‘Industrial Innovation’), the increased use of shared technology, infrastructure and services (‘Next Generation Internet’), and technologies that make financial services more efficient (‘Fintech Innovation’),” according to ARK Invest.

More states are emulating the California model and that could bode well ARKK long-term due to the fund’s significant Tesla exposure.

“With Virginia Governor Ralph Northam’s signature on 19 March, Virginia became the 15th state, alongside the District of Columbia, to adopt a zero-emissions vehicle (ZEV) mandate and impose stronger GHG emissions standards than the federal government on US automakers,” according to IHS Markit. “Under Section 177 of the US Clean Air Act, California has been allowed to impose tougher motor vehicle emissions standards than the rest of the nation. Invoking that authority, California set up a ZEV program that requires EVs or transitional EVs, such as plug-in hybrids, make up 22% of each automaker’s new in-state vehicle sales by 2025. By model year 2035, 100% of light-duty vehicles would have to be EVs.”

ARKK to Race Even Higher?

Due to increased concerns over environmental issues, global governments are supporting the development of electric vehicles worldwide.

One of the primary obstacles facing electric vehicle adoption is pricing relative to its internal combustion engine rivals. While EVs are still pricier than their traditional counterparts, the gap is closing, and that’s good news for exchange traded funds like ARKK.

“Colorado, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington already have received waivers from EPA. Assuming Virginia’s waiver is approved by EPA, IHS Markit estimates 35% of US new car sales would be covered by the California standards,” according to the research firm.

That’s good news for EV sales and, in turn, ARKK.

“IHS Markit forecasts that sales of EVs are set to exceed a 3.5% overall market share in 2021 and climb to more than 10% in 2025. More than 100 new EV options are expected to launch between 2021 and 2025, it said in a recent report,” concludes IHS Markit.

ARKK 1 Year Total Return

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.