The First Trust Nasdaq Global Auto Index ETF: Road To Success?

| About: First Trust (CARZ)

Summary

CARZ is composed mainly of the global industry leaders.

The fund also holds a small but diversified group of Chinese manufacturers.

There are a few holdings which are not exactly automobile manufacturers.

Since they first began to appear on dirt roads in France and Germany late in the 19th century, automobiles have always held a special fascination in the human psyche. At first, automobiles were 'hand built' affairs, requiring experimentation, innovations and even a new vocabulary. At first automobiles resembled the familiar horse drawn carriages. 'Horseless carriage' described these new machines well. Automobile did not refer to a specific machine in the 19th century. The word ' auto- mobile' referred to railcars and trams as well. (Can the reader imagine rushing through the subway station to catch the 'automobile'?)

Not long after prototypes were reliable and safe enough to be sold to the public, the first inventors: Nicolaus Otto, Gottlieb Daimler, Carl Benz and Emile Levassor, scaled up production. Credit for the first road worthy designed automobile goes to the 1901 Mercedes. It was produced for Daimler Motoren Gesellschaft and designed by Wilhelm Maybach; names which still resonate in the automobile industry today. By the end of the 'gilded age', Daimler Motoren Gesellschaft had 1700 employees and produced about 1000 vehicles per year.

In those early years of the 20th century preceding, the affordability of an automobile was only within the reach of the upper class. The popular PBS miniseries " Downton Abbey" accurately portrayed the evolution of European automobiles over the first twenty five years of the 20th century; chauffeur, footmen and all.

However, on the other side of the Atlantic Ocean, there was a different type of innovation. The first Mercedes was as luxurious in its early days as much as it is today. It completely outclassed the first 'Curved Dash' Oldsmobile model marketed in Lansing, Michigan by Ransom Olds in 1901, in all but one respect: the Olds was far more affordable and within the reach of the masses. By 1904 Olds was churning out more than any other manufacturer globally; over 5500 units per year! The new automobile industry was aided abetted by the business environment in early 20th century United States. It was completely laissez faire! Anyone who might beg, borrow or steal a few bucks could start up a business using their own ideas or those of others. There were few barriers to entry. Raw materials were plentiful and cheap, there were no tariffs between states and the shortage of labor meant workers could command high wages and those with high wages could, in turn, afford automobiles. American automobile manufactures literally sprang up like weeds across the country. Between 1900 through 1930, there were over 1800 auto manufactures in the US. By 1913 the US accounted for 80% of global automobile production. Of all the innovators in this new industry, Henry Ford ran ahead of the pack. There were three critical components to Ford's business strategy. Price efficiency by assembly line production, a no frills reliable product and wages high enough to put automobiles within the reach of his employees. To put the success of Ford's business model in perspective, over the life of the Model T line, 1912 through 1927, the price had been reduced from the initial $575 to last of the line $290. Over those years, 15 million Model T cars were sold.

The history is very interesting and thoroughly complex. The great depression reduced manufacturers to a mere handful and war industry demands of 1941-1945 completely ceased automobile production. Following the war the US " big three", General Motors (NYSE:GM), Ford (NYSE:F) and Chrysler (NYSE:FCAU), commanded the market. However, after the war European manufacturers reestablished their proud top-o-the-line brands. Japan also retooled and entered global markets with low cost efficient products. As decades passed, technology transformed the industry in both production methodology and the capabilities of automobiles themselves. The world is a mere few years away from the first fully driverless vehicles. It's fair to say that there's a lot of brand name pride driving the competition.

If the very brief outline has steered your mind towards investing in the automobile industry, but are overwhelmed by the modern depth and complexity of the industry, there's a very unique ETF product for you to test drive: the First Trust NASDAQ Global Auto Index Fund (NASDAQ:CARZ). According to First Trust:

... The index is a modified market-capitalization weighted index that includes securities of companies that are classified as an Automobile Manufacturer... ... To be included in the index... ...listed on an index-eligible global stock exchange... ...have a minimum worldwide market capitalization of at least $500 million... ...have a minimum three-month average daily dollar trading volume of $1 million...

Data from First Trust

The fund first traded in May of 2011, has had regular distributions resulting in a 12 month yield of 1.94% and an adjusted SEC yield of 2.78%. The index reflects the true potential of the fund with an index yield of 3.30%. The fund has 37 holdings covering $28,178,504 of asset value with 850,000 shares outstanding. The fund's P/E is well below the S&P average at 7.58 and sells virtually book value with a 1.01 multiple; the price of the ETF shares is 4.35 times the cash flow.

Still, every experienced investor knows that there's more to a fund aside from the basic metrics. The investor certainly doesn't want to be stuck with a lemon. (Except for a Citroën, perhaps). So then, it's important to check under the hood and kick the tires before getting into CARZ. This is best accomplished by fund weighting.

Company

Fund Weight

Market Cap

Yield

Div/ EPS

Price/ Cash Flow

Debt/ Equity

ROI

Brief Description

Daimler AG (OTCPK: OTCPK:DDAIF)

8.04%

$88.170

4.93%

41.41%

5.00

188.84

6.68

Premier global vehicle manufacturer

General Motors

7.80%

$47.818

4.91%

6.33%

2.50

158.29

6.79

Premier US manufacturer

Honda Motor Co (NYSE: HMC)

7.79%

49.564

3.44%

7.45%

4.51

96.53

4.44

Premier Japanese manufacturer

Ford Motor

7.77%

$54.842

4.59%

8.15%

4.71

463.84

7.34

Premier US manufacturer

Toyota Motor Corp (NYSE:TM)

7.63%

$182.49

3.42%

12.46%

5.48

110.23

4.52

Premier Japanese manufacturer

Tesla Motor Inc (NASDAQ: TSLA)

4.25%

$30.075

0.00

0.00

NA

249.38

-19.75

Fully electric vehicles; energy storage and fully electric powertrains

Hyundai (OTCPK: OTC:HYMLF)

4.18%

$347.629

2.61%

12.57%

5.20

72.17

8.93

8 brand names; Autos, Trucks, Busses; Financing and Parts; Established on every continent

Kia Motors Corp (OTCPK: OTC:KIMTF)

4.12%

$17.095

2.23%

16.81%

4.93

26.10

14.19

15 models sold in 8 counties; Korea's oldest auto manufacturer

Click to enlarge

Data from Reuters and company websites

The table above and the one below represents nearly 82% of the fund and, with a few exceptions, are the established top global producers. One of those exceptions is Tesla Motors, not yet profitable and production hardly measures up to the traditional fuel manufacturers. TSLA was founded to produce a price competitive, fully plug-in electric luxury car and it ranks among the top or close to top in the class of plug-in electric vehicles. The well-known entrepreneur, Elon Musk, became a leading investor and proponent of Tesla Motors with the goal of becoming price competitive with other traditional vehicles in its class. Its distribution model has been a source of controversy as Tesla does not use the traditional dealership model. However, without getting to deep, the company is a major fund holding at 4.25%. To be fair it has great potential, but is definitely not an industry heavyweight as the others in top weighting holdings. Lastly, it's important to keep in mind that the company's R&D in energy storage has been applied towards other consumer applications; hence the company has a potentially diversified product line.

Also within that top group is Korea's oldest auto manufacturer, Kia. Kia has respectable production at 1.4 million vehicles yearly, with 14 production facilities in 8 countries and 30,000 employees. Kia has a very recognizable brand name and 'the brand' is a main focus of the company. However, it's surprising to know that Kia does not yet rank in the top 20 global manufactures. On the other hand, it is far more profitable and productive than Tesla.

Company

Fund Weight

Market Cap (USD Billions)

Yield

Div/ EPS

Price/ Cash Flow

Debt/ Equity

ROI

Brief Description

Volkswagen AG (OTCPK: OTCPK:VLKAF)

4.10%

$68.319

4.23%

39.48%

2.51

77.62

2.86

12 Auto brands, trucks, busses; large bore diesel marine engines; transmissions; steam/gas/wind turbine and components

Bayerische Motoren Werke/BMW: (OTCPK: OTCPK:BAMXF)

4.07%

$57.821

4.02%

32.99%

3.47

215.57

6.42

6 Brands including Mini and Rolls Royce; BMW motorcycles; Financial Services

Fuji Heavy Industries (OTCPK: OTCPK:FUJHF)

3.93%

$28.379

2.68%

13.74%

6.57

6.96

29.12

Produces Subaru line; Also Aerospace machinery and refitting; Agricultural and Construction equipment

Renault SA (OTCPK: OTC:RNSDF)

3.90%

$28.20

2.84%

23.32%

4.09

NA

NA

Brands: Nissan, Datsun, Dacia, Infiniti, Renault-Samsung, Venucia, Lada and Renault

Suzuki Motor Corp (OTCPK: OTCPK:SZKMF)

3.85%

$0.570

2.14%

30.99%

3.57

17.66

4.75

11 Automobiles, marine outboard motors, motorcycles and ATV

Nissan Motors (OTCPK: OTCPK:NSANF)

3.84%

$43.915

3.45%

15.44%

3.49

150.89

5.26

Brands: Nissan and Renault-Nissan which produces Infiniti and Datsun

Harley-Davidson (NYSE: HOG)

3.30%

$8.78

2.93%

9.67%

9.24

374.55

9.73

Parent of Harley-Davidson Motor Co and Harley-Davidson Financial Services; Motorcycle Icon, customization, parts

Mazda Motor Corp (OTCPK:MZDAY)

3.18%

$9.295

1.44%

5.95%

4.49

69.18

2.52

59 consolidated subsidiaries and 14 affiliates globally. 11 auto models

Click to enlarge

Data from Reuters and company websites

There are a few standouts in the above second table. Although it might have a global mega-machine sound, Fuji Heavy Industries is indeed a diversified industrial but its main business is automobiles. In fact, it produces the very recognizable and popular Subaru line. Fuji is also maintains a major presence in aerospace, aerospace components and refitting, agricultural machinery, construction machinery, machine tools and generators. Also, included in the above table is the iconic motorcycle manufacturer Harley-Davidson. The closest HOG comes to making a car is its surprisingly popular "Trike" model; a three wheeled motorcycles built for the 'open air' long haul. HOG survived the Great Depression as well as the Great recession of 2008. The company is back on the road again with an $8.7 billion market cap, 2.93% dividend yield and a P/E of 13.22. HOG also has replacement parts and financial services divisions.

Company

Fund Weight

Market Cap

Yield

Div/ EPS

Price/ Cash Flow

Debt/ Equity

ROI

Brief Description

Porsche Automobil Holding SE (OTCPK: OTCPK:POAHF)

2.99%

$7.896

4.37%

20.93%

NA

0.97

NA

Holdings in VW via Porsche brand and 11 others. The company holds VW; VW owns the brands

Peugeot (OTCPK: OTCPK:PEUGF)

2.55%

$13.63

0.00

0.00

3.90

74.19

-6.67

Holding company of Peugeot, Citroen and DS; French brands as iconic as 'Champagne'

Mitsubishi Motors (OTCPK: OTCPK:MMTOF)

1.73%

$7.562

1.92%

8.17%

5.17

4.76

11.65

17 models; also manufactures parts and provides financing and leasing

Yamaha Motor Co, Ltd (OTCPK: OTCPK:YAMHF)

1.64%

$5.639

2.44%

20.35%

5.60

83.57

9.41

Motorcycles, scooters and ATVs

BYD Company Ltd (OTCPK: OTCPK:BYDDF)

1.41%

$18.681

0.00

0.00

NA

179.61

5.71

Provides batteries and components to IT sector as well as autos

Daihatsu Motor Co (OTCPK: OTC:DHTMF)

1.10%

$6.174

2.59%

11.27%

4.15

35.56

15.05

Specializes in very small passenger vehicles; majority owned by Toyota

Brilliance China Auto Holdings Ltd. (OTCPK: OTCPK:BCAUF)

0.98%

$4.631

1.54%

13.25%

8.79

18.81

26.57

BMW's China affiliate and manufacturer; domestic minibuses parts and components

Great Wall Motor Co. Ltd (OTCPK: OTCPK:GWLLF)

0.96%

$10.978

6.21%

18.75%

NA

20.12

25.50

Domestic vehicle and part manufacturer, with 3 subsidiary holdings

Click to enlarge

Data from Reuters and Company Websites

In 2007 Porsche SE began to acquire a large stake in Volkswagen AG eventually acquiring 50.79% ownership. Porsche created 'an integrated automotive group' with a collection of top brand names. In a complicated merger, VW owns the Porsche brand name (among many others), but Porsche Holdings owns a majority position in VW. Yamaha Motor Co. is also a non-automobile manufacturer. Yamaha produces its globally recognized brand of motorcycles as well as scooters, snowmobiles, ATVs, small electric generators and outboard marine engines.

Several Chinese manufacturers are also listed in the group. It should be carefully noted that although Germany, Japan and the US are the three largest automobile exporters, it takes the total yearly production of those three, about 27 million units to exceed that of all of China's at over 22 million units a year! In fact that's about double US yearly production and the US is the world's second largest producer!

Company

Fund Weight

Market Cap

Yield

Div/ EPS

Price/ Cash Flow

Debt/ Equity

ROI

Brands/Products

Geely Automobile Holdings Ltd (OTCPK: OTCPK:GELYF)

0.85%

$4.337

0.68%

12.90%

8.06

9.88

13.01

Domestic vehicle and part manufacturer holding 7 subsidiary manufacturers

Guangzhou Automobile Group (OTCPK: OTC:GNZUF)

0.80%

$15.144

0.80%

14.29%

NA

29.63

NA

Investment Holding Company with Gonow, Trumpchi and Changfeng brands; joint venture with Honda

Chongqung Changan Auto (SZ: 000625)

0.54%

$9.79

0.00

0.00

NA

6.35

15.94

SOE domestic auto manufacturer; affordable, efficient vehicles; joint ventures:Suzuki, Ford, PSA

Dongfeng Motor Group (OTCPK: OTCPK:DNFGF)

0.44%

$10.457

2.64%

16.13%

4.98

17.76

20.68

Commercial Buses, Trucks; passenger vehicles

UMW Holdings (KL: UMWS)

0.43%

$2.00

2.90%

NMF

10.45

94.12

0.06

Passenger and commercial vehicles; industrial vehicles; oil and gas equipment, lubricants

Yulon Motors (TW: 2201)

0.31%

$1.480

2.94%

66.67%

4.93

2.10

3.12

Manufactures for Nissan in Taiwan; domestic brands Luxgen, and Tobe; joint PRC ventures

Nissan Shatai (TW: 7222)

0.29%

$14.990

0.79%

4.20%

6.27

0.00

4.71

Domestic vehicles passenger, commercial and mass transit; 43% owned by Nissan

AviChina Industry & Technology (OTC:AVIJF)

0.26%

$3.947

0.45%

17.64%

10.01

97.87

12.10

Mostly civil aviation; the fund classifies it as industrial

Click to enlarge

Data from Reuters and company websites

Several of the Chinese manufacturers assemble popular world class brand models. For instance, Brilliance China Auto Holdings manufactures BMWs and Taiwan based Yulon Motors is a licensed manufacturer for Nissan. One other holding to make note of is Italy's Piaggio & Company, manufacturer of the wildly popular and iconic Vespa Scooter as well as other popular models.

Company

Fund Weight

Market Cap

Yield

Div/ EPS

Price/ Cash Flow

Debt/ Equity

ROI

Brands/Products

China Motor Corp (TW: 2204)

0.18%

$0.994

5.08%

52.75%

7.45

1.73

6.01

Domestic Taiwan auto manufacturer; affiliate of Mitsubishi

Sanyang Motor Co (TW: 2206)

0.17%

$0.584

0.00

0.00

4.40

92.46

1.83

Taiwan SYM brand: manufacturers in Taiwan, Vietnam, China

Piaggio & Co (OTCPK: OTCPK:PIAGF)

0.13%

$0.758

2.67%

166%

5.79

154.82

2.39

Italian motorcycles and scooters; Piaggio, Vespa, Gilera, Aprilia, Moto Guzzi, Derbi and Scarabeo

Ssangyong Motor Co. (KS:003620)

0.11%

$0.103

0.00

0.00

12.66

5.23

-5.82

Domestic Korean multi-purpose vehicles and autos

Kolao Holdings

0.08%

$0.394

1.04%

7.79%

6.87

15.94

17.53

Auto distributer of Kia, Hyundai, Chery; Used cars, motorcycles

Averages

2.69%

$32.52

2.40%

19.67%

5.782

89.53

8.017

Click to enlarge

Data from Reuters and company websites

Lastly, as if motorcycles, 'trikes', scooters, snowmobiles and outboard marine engines seem out of place, the index contains AviChina Industry & Technology which seems to have little to do with automobiles, if anything, at all. It is a leading China manufacturer of fixed wing aircraft, helicopters, aviation equipment and aviation component parts.

In total, the fund wisely maintains a position in the Chinese auto manufacturing sector, but in amounts mostly less than 1% and totaling less than 8% of the fund's total holdings.

For investors who wish to extend their portfolio a little further out on the risk curve but not unduly so, this might be a good pick. The fund has low volume but with an average three month volume of just under 14,000 shares, it does present the opportunity for an entry position.

Click to enlarge

The fund has not performed very well recently. The shares are currently trading between all-time highs and lows, but there have been consistent distributions. It's a very focused fund in a powerful industry. Should the global economy continue to slow, no doubt the fund would decline also. However, if you wish to be invested in the auto industry, but don't wish to be sitting in the back seat letting one or two companies drive your portfolio, you can put yourself in the driver's seat with CARZ.

Quarter End Performance as of 12/31/2015

3 Month

Year to Date

1 Year

3 years

Inception 5/9/2011

Share Price

8.86%

-1.07%

-1.07%

8.89%

5.42%

NAV

9.44%

-0.83%

-0.83%

9.28%

5.51%

Index

10.91%

0.28%

0.28%

10.86%

6.74%

Click to enlarge

Data from First Trust

The automobile industry is in its 120th successful year, in spite of numerous global conflicts, worries about rising fuel prices and several severe economic downturns. The industry is on the cusp of a new phase of technological innovation. If you have a long term horizon, it might be worth getting into cars a letting it drive you towards your investment goal.

Mike Scrive

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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