After a rough patch, the auto industry is finally showing a steady pickup in activity. This is largely thanks to improving economic fundamentals on the labor front, growing demand, an improving car market, a plethora of new models, and increasing consumer sentiment (read: Play a Surging Auto Industry with These ETFs).
In fact, U.S. auto sales jumped 9% in November pushing annual vehicle sales to 16.4 million, buoyed by sales to replace an aging fleet of cars and trucks. This represents the best month for auto sales in nearly seven years, suggesting that the industry is on the right path of delivering strong growth. The promotional offers during Thanksgiving and Black Friday also gave a huge boost to the month’s auto sales.
The surge in the auto space can easily be felt as the pure play First Trust NASDAQ Global Auto ETF (CARZ) surged nearly 34% this year and easily outpaced the gains of 29.5% for the broad market fund (SPY). Robust performances from some of the big automakers like Ford Motor (F), General Motors (GM), Tesla Motors (TSLA), Toyota (TM) and Honda (HMC) helped the automotive ETF to soar.
Let’s take a look whether this uptrend will continue in 2014:
Industry Trends Improving
It’s not just the U.S. market which is surging, a number of international economies are also showing strong car sales. With rising demand for new cars, Europe is showing strong signs of recovery.
Emerging markets too are showing strength of late, led by the double-digit growth in China – the world’s largest car market. All these developments indicate a bullish trend in the car market across the globe going forward in 2014.
According to the latest data from IHS automotive, global auto industry sales would rise to 85 million in 2014 and 100 million by 2018 from the expected 82 million for this year (read: These 3 ETFs Could Soar on Strong Car Sales).
Auto Stocks in Focus
Among the global auto manufacturers, Ford has been a strong performer this year with solid gains across all regions, except Europe. But the company expects a sluggish sales environment in its European and South American operations in 2014, which could weigh on its profitability. Additionally, the weak Japanese yen and increasing cost for product launches added to the woes.
After struggling for several years, General Motors seems back on track, as it exited the government bailout program earlier in the month. The U.S. government finally divested its entire stake in the GM stock, shedding the notorious label of ‘Government Motors’ that the program gave to the company.
This marks the turning point in the company’s history and the return of GM to the top spot in the US auto industry (read: End of General Motors (GM) Bailout May Send These ETFs Higher).
TSLA has seen an incredible run in its share price this year, but disappointing third quarter results and the recent three Model S fires seem to have put the brakes in its surge in recent weeks.
On the other hand, the Japanese carmakers – Toyota and Honda – have bounced back nicely and are clearly benefiting from Prime Minister Abe’s economic reforms and the Bank of Japan’s efforts (read: Japan ETFs: One Year After Abenomics).
Though the auto companies have a mixed stance on its future profitability, investors could bet on this sector and the auto ETF going forward in 2014 given the positive industry trends and upbeat auto sales outlook. Further, investors’ shift toward the riskier corners of the stock market would provide an added advantage to the fund.
CARZ in Focus
The ETF tracks the NASDAQ OMX Global Auto Index, holding 38 stocks in the basket. It is highly concentrated in its top 10 holdings with 61% of assets going to these ten firms, suggesting that company specific risk is high and the top 10 firms dominate the returns of the fund. Daimler (DDAIF), Honda and Ford are the top three holdings with a combined share of 25%.
In terms of country exposure, Japan takes the top spot at 33% while Germany and the U.S. get a decent allocation with 22% and 20%, respectively (see: all consumer discretionary ETFs here).
The ETF has amassed $52.1 million in its asset base and sees light volume. The product charges 70 bps in annual fees from investors.
CARZ currently has a Zacks ETF Rank of 2 or ‘Buy’ with High risk outlook, suggesting that the product is expected to outperform the market in the coming months, especially if some of the positive car market trends outlined above stay intact.
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- Automotive Industry
- General Motors