Behind the Surge in the Auto ETF

Zacks

The U.S. automotive industry continues to recover strongly from the rough period over the past few years. In fact, recent months have seen the highest monthly sales levels since before the recession began.

This is particularly true given improving labor and housing markets that led to robust demand for trucks, small cars and cross-overs. Further, pent-up demand, lower interest on auto loans and a resilient economy leading to higher consumer confidence contributed to the big push in auto sales (read: 2 Sector ETFs Surging This Earnings Season).

Overall, auto sales jumped 9% to 1.40 million units in June, translating into a 13.2% year-over-year rise to a seasonally adjusted annual rate (:SAAR) of 15.96 million units. Meanwhile, figures for July were also solid, coming in at an annual rate of 15.7 million units, suggesting a pretty firm automotive market.

How to Play

Investors have a number of  ways to play the surge in the car market. Obviously there are a plethora of stocks, and in this sphere General Motors (GM) led the way, followed by Ford Motor (F), Chrysler, Toyota (TM), Nissan (NSANY) and Honda (HMC).

But given the ongoing boom and the continued optimism in the auto industry, investors should focus on the only pure play ETF in the space for broad exposure – the First Trust NASDAQ Global Auto ETF (CARZ) -that tracks the NASDAQ OMX Global Auto Index.

Currently, the ETF is under-appreciated and considered unloved by many investors as indicated by its AUM of only $25.6 million and average daily trading volume of just under 20,000 shares.

However, the product has delivered outsized returns of nearly 8% in July alone and over 27% in the year-to-date period. This is higher than the broad market fund, SPY, and other products in the consumer discretionary space by a wide margin (read: Top ETFs of the First Half of the Year).

Due to this history and the solid trends in the space, we think the CARZ could be poised for a further surge in the coming months. This could be particularly true when looking at some technical factors as well, which we have described below:

Technical Look

The fund recently made its new high of $37.86 and its short-term moving averages have managed to stay above long-term levels. The 9-Day SMA is now comfortably above the longer-term 200-Day SMA, suggesting continued bullishness for this ETF.

Meanwhile, the fund’s RSI is at just under 60, suggesting that the fund isn’t too overbought, and that it still has some more room to run. This is further confirmed by an upswing in the Parabolic SAR, although this figure should definitely be monitored closely.

Fundamentals

The fund provides exposure to a small basket of 38 stocks with a tilt to large caps. It is highly concentrated in its top 10 holdings with 60% of assets, suggesting that company specific risk is high and the top 10 firms dominate the returns of the fund. Some of the top 10 holdings include Daimler (DDAIF), Ford, Toyota, Honda, Volkswagen (VLKAY) and GM (see more in the Zacks ETF Center).

As such, better-than-expected earnings from these firms would drive the ETF higher. Recently, Daimler reported second quarter earnings that nearly tripled from the prior-year quarter. Daimler is the top firm in the fund’s portfolio with an 8.26% allocation, closely followed by Ford at 8.26%.

Ford also delivered impressive results with 50% rise in earnings per share and 14% increase in revenue when compared to year-ago quarter. The company surpassed the Zacks Consensus Estimate on both the top and bottom lines.

The upside momentum continued after Detroit automaker General Motors reported strong profit boosted by demand for pick-up trucks in North America and cost-cutting in Europe. Though earnings per share fall marginally from the year-ago quarter, it beats Zacks Consensus Estimate by 6 cents. GM represents 4.65% of assets and occupies the sixth position in the fund’s basket behind Toyota, Honda and VLKAY.

In terms of country exposure, Japan takes the top spot at 34% while Germany and U.S. gets a decent allocation with 23.4% and 20%, respectively (read: Time to Focus on Yen-Hedged Japan ETFs?).

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 over a one-year period.

Bottom Line

Investors should note that the auto sector is highly concentrated as the top 10 global automakers account for roughly 80% of the worldwide production and nearly 90% of total vehicles sold in the U.S.

Despite heavy concentration, the sector is well positioned for future growth as investors are slowly moving into the “riskier” corners of the stock market (cyclical stocks such as autos) from the defensive ones (read: Buy These ETFs to Profit from "Sector Rotation").

Given the promising trends for cyclical stocks at this time, some investors may want to consider buying into this automotive ETF in the short term. If the economy continues to rebound, we could see further gains in the automotive space making this a potentially good time to get into this surging sector.

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