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Auto Sales Hit the Brakes in 2017: ETFs & Stocks in Focus

Sweta Killa
Tilly's (TLYS) closed the most recent trading day at $16.18, moving -0.98% from the previous trading session.

The seven-year sales growth streak for the auto industry hit the brakes in 2017 as it suffered its first annual sales decline since the financial crisis. Though sales dropped 1.8% from the last year to 17.2 million vehicles, 2017 still marks the fourth-best sales year in U.S. history. This is because this is the first time that the industry has cleared the 17-million mark for three consecutive years.

Of the six major American and Japanese automakers, Fiat Chrysler FCAU posted the biggest sales decline of 8.2%, followed by modest declines of 1.3% for General Motors GM, 1.1% for Ford Motor F and 0.6% for Toyota TM. Nissan Motor NSANY and Honda HMC sales were up 1.9% and 0.2%, respectively.

A strong economy, low unemployment, increasing consumer confidence, higher spending, fuel-efficient and technologically enriched vehicles, and relatively low oil prices will continue to fuel the industry. Additionally, the tax reform will provide a lift to U.S. sales but at the same time also encourage rate hikes, which will make financing of new vehicles expensive (read: Bet on Trump Trade & Republicans with These New ETFs).

The shift in consumers' preference from passenger cars to more profitable pickup trucks and SUVs, as well as longer usage of vehicles will be a drag on sales. The average age of vehicles on the road has climbed to 11.6 years, up from 8.8 years in 1998. Given this, 2018 might be the year of challenges for automakers with many market experts expect auto sales to fall below 17 million in 2018.

Investors should note that the auto sector has a solid Zacks Rank in the top 38% and the valuation looks appealing at the current level with a P/E ratio of 12.23, the lowest of all the 16 Zacks sectors. This could provide an upside to the stocks this year.

That said, we have highlighted three ETFs & stocks that will be in focus this year and could be attractive picks as well.

First Trust NASDAQ Global Auto ETF CARZ

This fund offers pure play global exposure to 34 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is a large-cap centric fund with high concentration on the top five holdings with about 8% share each. In terms of country exposure, Japan takes the top spot at 34.4% while United States and Germany round off the next two spots with 21.6% and 19.4% share, respectively. CARZ has a lower level of $21.2 million in AUM and trades in a small average daily trading volume of about 4,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

iShares Global Consumer Discretionary ETF RXI

While RXI provides broad exposure to the consumer discretionary space around the world, investors could go for this product as it has about 21% allocation to the auto industry. Holding 175 stocks, the fund is skewed toward the top firm at 10.3% while the other firms hold less than 5% share. American firms make up for 61.5% of the portfolio while Japan takes the next spot at 14%. It has $231.7 million in AUM and charges 48 bps in annual fees. Average daily volume is light at around 15,000 shares.

First Trust Consumer Discretionary AlphaDEX Fund FXD

This fund also targets the broad consumer discretionary segment with around 13% allocation to the auto industry. It holds 113 securities in its basket with each accounting for less than 2.3% of assets. It has amassed $515.5 million in its asset base and trades in a moderate average daily volume of roughly 91,000 shares. It charges 63 bps in annual fees from investors and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 8 Power-Packed ETFs for 2018).

Allison Transmission Holdings Inc. ALSN

This Indiana-based company is engaged in the manufacturing of fully automatic transmissions for medium- and heavy-duty commercial vehicles, medium- and heavy-tactical U.S. military vehicles and hybrid-propulsion systems for transit buses. The company has seen positive earnings estimate revision of four cents for 2018 over the past 30 days, representing year-over-year growth of 6.75%. The stock has a Zacks Rank #2 and a VGM Score of B.

BorgWarner Inc. BWA

This Michigan-based company is a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles. It saw positive earnings estimate revision of a penny for 2018 over the past 30 days reflecting year-over-year growth of 7.19%. It has a Zacks Rank #3 and a VGM Score of B (read: Inside The Surge in Lithium ETF).

Tata Motors Ltd TTM

This is India's leading automotive manufacturer. While no earnings estimate revision was seen over the past 30 days, the company’s earnings are expected to grow 37.11% in the fiscal year (March 2019). The stock has a Zacks Rank #2 and a VGM Score of A.

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