Is The Auto ETF Headed For A Trump Bump Or Slump?

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Includes: CARZ
by: Zacks Funds

After a smooth ride in 2016, the auto industry seems to have slowed to start 2017. The industry's February sales dropped 1.1% year over year on weaker demand for cars, following a 3% decline in January. However, seasonally adjusted annual sales remained strong at 17.57 million, painting a not-so-drab outlook.

Per the source, China is expected to provide a tailwind to global auto sales in 2017, thanks to the increased adoption of new energy vehicles and smart connected cars. European automakers too posted better results lately. But it was the Trump bump that gave the biggest push.

How Trump to Benefit Auto Industry

By now, we all came to know that president Trump is in favor of deregulation. Going by this norm, the U.S. president plans to reconsider stringent vehicle fuel efficiency rules - meant to lower greenhouse gas emission - locked in through 2025 at the end of the Obama administration. In any case, Trump doesn't seem to be a strong proponent of the Environmental Protection Agency's (EPA) rule.

As per a source, Auto Alliance, an association of 12 automakers, recently requested EPA to remove the standards. This is because of the fact that conventional vehicles represent about 96.5% of the new light-duty vehicle fleet, and "none of these conventional vehicles are compliant with the fuel economy standards envisaged in 2012." In fact, automakers have to shell out $200 billion more to get to that goal. So, from this perspective, Trump's promises look attractive to automakers.

Are There Any Glitches?

First, this relaxation in emission norms will come at the cost of bringing the outsourced jobs back to the homeland as Trump has been intending since his campaign days. Companies like Ford Motors (NYSE:F) and General Motors (NYSE:GM) get their car production outsourced from Mexico.

So, these companies may also bear the brunt of outsourcing. Moreover, Ford and General Motors normally enjoy huge U.S. government subsidies they may lose in the outsourcing practice.

Plus, along with several other analysts, even we believe that several automakers have started taking initiatives to comply with the emission norms and have invested heavily in the program. So, these fixed costs and R&D expenditure are less likely to be recovered.

ETF in Focus

Whatever the case, we expect things to fall in place for automakers this year. After all, the global economy has been gathering steam, which in turn should translate into higher demand. Given this, we expect the auto ETF, the First Trust NASDAQ Global Auto Index ETF (NASDAQ:CARZ), to do well ahead (see all Consumer Discretionary ETFs here).

CARZ in Focus

This fund offers pure play global exposure to 33 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 40% of assets. In terms of country exposure, Japan takes the top spot at 34.76%, with the U.S. and Germany rounding off the next two spots with 23.0% and 18.9% share, respectively.

CARZ has a lower level of $20.1 million in AUM and trades in a small average daily trading volume of about 15,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank of 3 or "Hold" rating with a High risk outlook. The fund is up about 6% so far this year (as of March 20, 2017).

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