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NIO stock is down 25% in the last few weeks! Should I buy it for my ISA?

Holders of shares in electric car maker NIO (NYSE: NIO) have endured a tough few weeks. After hitting a high of $55 back on November 23, the share price has now fallen almost 25%. What’s going on and should Foolish UK investors such as myself see this as an opportunity to snap up NIO stock for their ISAs?

Why has NIO stock fallen?

There could be a couple of reasons why NIO stock has slipped into reverse gear of late. 

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For one, the China-based company recently announced that it would soon be issuing 68 million shares into the market, raising up to $2.65bn in the process. This money will be used to develop new products and grow its sales and service network. 

As experienced Fools will know, the problem with a firm issuing new shares is that those already holding have to endure their stake being diluted. In other words, NIO’s earnings will now be spread across many more shares.

Another reason for the falling valuation is that the NIO stock price has simply become overheated. After all, the stock is up a staggering 1,100%+ in 2020 alone! No wonder traders have started taking profits.

Should UK investors get involved in NIO stock?

It’s a tricky question to answer. There can be no doubt that electric vehicles are here to stay. However, the ‘pop and drop’ volatility seen from share prices in this area is unnerving. There’s no guarantee this negative trajectory won’t continue for a while yet.

Another problem is that we’re still at the beginning of this momentous shift. This makes distinguishing the winners from the losers more akin to guesswork. Many operating in this area are running at huge losses and might not survive.

Even those that do will require huge amounts of ongoing investment if they are to emerge as pioneers in this space. Indeed, Tesla went looking for $5bn recently. NIO’s peers Li Auto and Xpeng also went cap in hand to investors. 

Stay diversified

As promising as the EV revolution is for investors across the globe, I’m not sure I want to invest in a single company just yet. That said, there is another way of getting more diversified exposure to this space than just buying NIO stock.

The passive iShares Electric Vehicles and Driving Technology UCITS ETF is a decent option. For an ongoing fee of just 0.4%, investors get access not just to the manufacturers of the cars themselves, but also to their suppliers.

At the time of writing, the fund is up 28% in 2020. The only downside is that NIO stock isn’t held within the portfolio. Even so, it does show that I don’t necessarily need to own this stock to rapidly grow my wealth. 

Those like me looking for an active fund could consider FTSE 100 member Scottish Mortgage Investment Trust too, which has a large holding in Tesla. It’s doubled in value this year!

ISA it

While I’m not thinking of buying NIO stock just yet, I think it’s essential that anyone considering an investment in this space holds whatever they buy within a Stocks and Shares ISA. After all, anything within this wrapper is immune to capital gains tax. Given the magic that is compounding growth, that could turn out to be a small fortune in decades when the full shift to electric vehicles is under way.

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Paul Summers owns shares in Scottish Mortgage Investment Trust. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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