Investing In The Automobile Sector With ETFs (IPD, PALL, PPLT, F, GM, TTM, JCI, GT)

Sam Subramanian:  Auto stocks have benefited from U.S. economic recovery from the Great Recession. The DJ U.S. Automobiles & Parts index ($DJUSAP) is up nearly 350% since March 2009 bottom.

Fidelity Investments is a prominent player in this sector having launched Fidelity Select Automotive (FSAVX) nearly 25 years ago.

ETF investors had to look for surrogate plays like SPDR S&P International Consumer Discretionary ETF (NYSE:IPD) with over 25% of its assets in world’s leading automakers. ETFS Physical Palladium (NYSE:PALL) and ETFS Physical Platinum (NYSE:PPLT) are other options since nearly 57% and 50% of the world palladium and platinum supplies, respectively are used in auto exhaust treatment.

Two New ETFs to Invest in Autos

Recently, two new sector ETFs have forayed into the arena in a bid to end Fidelity’s monopolistic hold. First Trust and Global X launched the NASDAQ Global Auto Index ETF (NASDAQ:CARZ) and the Global X Auto ETF (NYSE:VROM) on May 10 and May 19, respectively.  The two ETFs differ in the industries they cover within the auto sector.

  • First Trust ETF

First Trust Global Auto Index ETF concentrates on global automakers. The underlying NASDAQ OMX Global Auto index includes 32 automakers from nine developed and emerging market countries.

Automakers from Japan, U.S., and Western Europe account for 82% of the ETF’s assets.  The ETF invests the remaining assets in stocks of automakers in emerging nations of Asia.

The top ten holdings include German automakers  BMW (BAMXF.PK), Daimler (DDAIF.PK), & Volkswagen (VLKAY.PK), U.S. automakers Ford (NYSE:F) & General Motors (NYSE:GM), and Japanese automakers Toyota Motor (NYSE:TM) & Honda Motor (NYSE:HMC).

  • Global X ETF

Global X Auto ETF (NYSE:VROM) seeks to track the S-Network Global Automotive Index, which holds the stocks of 50 largest companies involved in the auto industry. The ETF allocates 74%, 19% and 7% respectively to automakers, auto parts suppliers, and tire companies.

This ETF invests nearly 80% of its assets in developed markets. The remaining 20% is invested in emerging market auto industry companies. The ETF restricts allocation to any one country to 25%.

Besides the automakers included in the First Trust ETF, the Global X ETF holds automaker Tata Motors (NYSE:TTM), auto parts makers Johnson Controls (NYSE:JCI) and Magna International (NYSE:MGA) and tire maker Goodyear Tire & Rubber (NYSE:GT).

AlphaProfit’s Take

Both ETFs aim to facilitate investors to profit from auto demand in developed and emerging markets. First Trust ETF offers exposure to automakers. Global X offers broader exposure including auto, auto parts, and tire companies.

Wards Auto estimates global auto sales to increase by 38% to 107 million units in 2020 from 77.5 million units in 2011. The growth will be driven primarily by a 62% demand increase in emerging nations. Auto sales are estimated to increase by 61% in China to 163% in India. Auto sales are estimated to grow by 5% in developed markets.

The outlook for the auto sector does not however appear to be salubrious in the near term.  Consumer sentiment is waning in U.S.  Emerging nations are tightening their monetary policies in a bid to contain inflation. Having gained triple digits, auto stocks are trading closer to the peak rather than to the trough.

As is often the case with any sector ETF, one has to seize the right time for investing to realize outstanding returns from auto ETFs.

ETF investors who sit out waiting for the auto cycle to bottom stand to reap rich rewards.

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Written By Dr. Sam Subramanian From AlphaProfit

Dr. Sam Subramanian is Managing Principal and Chief Investment Officer of AlphaProfit Investments, LLC. He edits and publishes the AlphaProfit Sector Investors’ Newsletter™. The AlphaProfit Sector Investors’ Newsletter has received the distinction of getting ranked #1 by Hulbert Financial Digest several times. He also edits the AlphaProfit’s popular investing blog and e-letter MoneyMatters.

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