Tuesday marked another first for the rapidly-expanding ETF industry, as First Trust rolled out the NASDAQ Global Auto Index Fund (CARZ). The new automotive ETF will seek to replicate a benchmark comprised of the largest and most liquid companies engaged in the manufacturing of automobiles. The underlying NASDAQ OMX Global Auto Index consists of about 30 companies from nine developed and emerging markets, including Japan, Germany, the U.S. and China.
The largest individual allocations go to Daimler (OTCPK:DDAIF), GM (GM), Honda (HMC) and Toyota (TM). U.S. stocks account for about 18% of total assets. Japan (33%) and Germany (20%) make up the largest country allocations. The related benchmark is a modified market cap-weighted index, capping the allocation to any one security to avoid significant concentration in any one name.
Auto Industry in Focus
In the U.S., the automotive industry has ventured to the edge of collapse and back in recent years, as shifts in consumer preferences and overwhelming inefficiencies forced Detroit’s “big three” to drastically cut back workforces, slash spending and revamp product lineups to focus more on fuel-efficient vehicles. Now, there are signs that the auto industry is headed back to profitability. Ford (F) recently reported its best quarter since 1998 while GM tripled its profit in the first quarter of the year.
While the U.S. automotive industry is on the rebound, the real appeal of an investment in the car business lies in the overseas potential. Driven by new-found wealth and ongoing urbanization, emerging markets such as China and India have become the most important markets for global auto companies. In 2009, China surpassed the U.S. to become the biggest automotive market by number of vehicles sold, and in 2010 emerging markets accounted for more than half of global light-vehicle sales for the first time ever. Car sales in China are expected to grow by 11% this year, while units sold in India are projected to jump by 17% in 2011.
Despite the tremendous growth in recent years, the potential in emerging markets remains enormous. In China, approximately 57 out of every 1,000 people own a car. In Australia, that figure is 717, and in the U.S. the ownership rate is close to 80%. Many emerging markets, including India, maintain car ownership rates that are considerably lower than China’s - but that are growing at an impressive pace.
First to Market
First Trust becomes the first issuer to introduce an ETF focused exclusively on the automotive industry, beating out at least two other companies that had laid the groundwork to launch car ETFs. Global X detailed plans for a car ETF earlier this year and Direxion first mentioned a potential car ETF in an SEC filing last year. There may be room for additional players in this space, as there are other ways to structure products offering exposure to this market. The new First Trust fund, for example, is light on exposure to emerging markets - instead investing heavily in stocks listed in developed economies. China accounts for only about 5% of assets and Indian car manufacturer Tata Motors (TTM) is nowhere to be found. One of the other automotive ETFs in the pipeline could offer a unique risk/return profile by shifting holdings away from Detroit’s Big Three and toward China’s Big Five. Excluding Taiwan and South Korea, emerging markets make up only about 6% of the total portfolio, with no exposure at all to Indian stocks.
There’s also the potential to introduce a fund that offers more broadly-based exposure to the global automotive industry. While CARZ focuses primarily on manufacturers, there are dozens of publicly-traded companies that are involved in the sale and production of various automotive components. As such, the profitability of these companies depends on the health of the automotive industry as well.
Fidelity has offered a Select Automotive Mutual Fund (FSAVX) for more than a decade. That fund has assets of about $200 million and charges an expense ratio of 0.91%. The new ETF from First Trust will charge 0.70%.
Disclosure: No positions at time of writing.
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