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Auto ETF Could be Stuck in Neutral


The First Trust NASDAQ Global Auto Index Fund (CARZ) is  up more than 31% over the past year. That surge serves as proof that although U.S. vehicle sales have not rebounded to all-time highs, auto sales are recovering inline with the broader economy.

CARZ is slightly over the past month following a tepid batch of December sales data, but there were other factors at play.

“December 2013 wasn’t the industry’s best showing, with a seasonally adjusted selling rate of 15.4 million units.  That’s obviously below the average for the year, but industry analysts pointed to poor weather as one cause for the shortfall.  I would also add that the seasonal adjustors used to get that result are notoriously twitchy and any one month needs a whole salt mine served alongside,” wrote Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York, in a note out Tuesday.

In what could be a cautionary tale for the $52.6 million CARZ and some of its 38 holdings, U.S. auto inventories are on the rise.

“More worrisome is that dealer inventories are quite high – some 3.7 million units in December, or 77 days supply .   This is an oddball bit about the U.S. light vehicle market – consumers don’t order from the factory.  The length of time between when a household decides to buy a car or truck and when they drive it off the dealer lot is a week or so.  That’s why you see so many vehicle ads on television, year round.  Automakers know they have to catch you in that short window, get on your ‘Consideration list’ and put you in the showroom.  Still, a more normal vehicle inventory is 65-70 days at this time of year,” according to Colas. [Auto ETF Flails as Government Shutdown Drags On]

CARZ may not have a secret weapon, but it does have an under-appreciated trait that could help it endure near-term blips in auto demand: The weak yen. Sure, Ford (NYSE: F) and General Motors (GM) are both top-10 holdings in the ETF and combine for almost 12% of the ETF’s weight, but Japan is almost 34.4% of the geographic weight in CARZ.

That is almost 1,500 basis points higher than the allocation to the U.S.  Non-Japanese automakers such as Ford have not been shy about divulging their thoughts on the weak yen. South Korea has identified the falling Japanese currency as one of the two biggest risks to its economy. And Germany, the Eurozone’s largest economy and a major auto exporter, has also vocally criticized Japan’s currency policy. [Weak Yen Winners and Losers]

CARZ may not be a Japan ETF, but 10 of its 38 holdings are Japanese firms, highlighting the usefulness of CARZ as a weak yen play.

First Trust NASDAQ Global Auto Index Fund