Global X announced the latest expansion to its rapidly-growing product lineup, rolling out a fund designed to deliver exposure to the global automotive industry. The Global X Auto ETF (VROM) will seek to replicate a benchmark of companies that are engaged in the production of automobiles, automobile parts, tires and related activities, including 50 of the largest and most actively traded companies worldwide that are principally engaged (derive greater than 50% of revenues from sources listed above) in the automobile industry. The underlying S-Network Global Automotive Index makes its largest country allocations to traditional auto powerhouses: Germany, Japan and the U.S. all account for about 23% of the underlying portfolio, while Toyota (TM), Daimler (OTCPK:DDAIF) and Ford (F) are among the largest individual components.
In addition to heavy weightings in some of the world’s largest producers of automobiles, the fund will also offer exposure to smaller companies that develop automotive parts, potentially giving investors a more thorough cross-section of the car industry and diversifying exposure away from mega caps. One example of this broader automotive focus is Johnson Controls (JCI), which provides car batteries, interiors and electronics to a variety of manufacturers in the car industry, and makes up roughly 4% of VROM’s total assets. The company, like many others that provide parts and supplies to car manufacturers, are often highly correlated to major car companies like Ford, making it a play on the sector at large as well.
Auto Industry Under the Microscope
While the U.S. automotive industry is on the rebound, the real appeal of an investment in the car business lies in the overseas markets. Driven by new-found wealth and ongoing urbanization, emerging markets such as China and India have become the most important regions for global auto companies seeking to boost growth in these up-and-coming locales. 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, giving companies in the sector a chance to grow despite lackluster performances in many of the world’s key developed markets.
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 are growing at an impressive pace nonetheless.
VROM could also have appeal as a trading vehicle on certain days. Automotive stocks often seek significant spikes in volume and volatility when major manufacturers report their monthly sales totals. Earnings reports from members of the “big three” or more global auto producers can also put the sector in the spotlight, potentially creating short-term opportunities in both directions.
VROM vs. CARZ: Head-to-Head
This new fund will compete most closely with the recently-launched Nasdaq Global Auto Index Fund (CARZ) from First Trust. This fund adopts a similar strategy when it comes to investing in the car industry as it gives the biggest weightings to companies in Japan, Germany and the U.S. However, beyond this initial glance there are some striking differences between CARZ and VROM. First is the total number of holdings and the general focus on the industry. CARZ invests in just 32 securities compared to 50 for VROM, a fact that is likely a reflection of Global X’s wide net approach and the focus of CARZ on just the major manufacturers of automobiles.
Another large difference between the two is the weighting afforded to General Motors (GM). In CARZ, GM receives the second highest weighting at just over 7.6% while the automotive giant gets under 3% from Global X and barely sneaks into the top 10 for the fund’s holdings as a result. In terms of country exposure, similar issues arise as Japan makes up nearly 32% of CARZ while German and U.S. holdings are 20.2% and 17.7%, respectively. This is in sharp contrast to VROM which affords each of these three auto producing countries a roughly equal weight of about 23% each. Emerging market exposure is also different between the two as CARZ puts roughly 6% in emerging countries - with the lion’s share of that going to Chinese firms - while VROM has close to 10% of its assets in emerging markets, with companies from China, India, and Indonesia all being represented.
VROM is also cheaper than the First Trust product, charging 0.65% compared to 0.70% for CARZ.
Despite these differences, both products remain viable choices for investors seeking more granulated exposure to the automotive industry. Thanks to the new fund from Global X, investors can now choose if they want to get broad exposure to companies that are engaged in some aspect of the automotive process or if they would rather invest in just the major production firms that are responsible for providing the finished products to the masses.
Disclosure: No positions at time of writing.
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