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Sam Subramanian

Auto ETFs: First Trust CARZ and Global X VROM

Sam Subramanian PhD, MBA

The automotive sector has been among the top performers since the U. S. economy emerged from the Great Recession. The DJ U.S. Automobiles & Parts index ($DJUSAP) is up over 330% from the March 2009 bottom.

Until now, Fidelity Select Automotive (FSAVX) has been the sole pure-play vehicle for investors looking to invest in the auto sector via bundled products.

ETF investors had to content themselves with surrogate plays like SPDR S&P International Consumer Discretionary ETF (IPD), ETFS Physical Palladium (PALL), or ETFS Physical Platinum (PPLT) to play the auto cycle.

Two Pure-Play Auto ETFs

Now, two pure-play sector ETFs are available for investing in the auto sector. First Trust came out with the NASDAQ Global Auto Index ETF (CARZ) on May 10. Soon after, Global X launched the Global X Auto ETF (VROM) on May 19.

The two sector ETFs differ in two respects: coverage of sub-industries and geography.

First Trust Auto ETF - CARZ

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

Automakers from U.S., Western Europe and Japan account for 82% of the ETF's assets. The top ten holdings make up 60% of the ETF's assets. They include German automakers Daimler (DDAIF.PK), Volkswagen (VLKAY.PK) & BMW (BAMXY.PK), U.S. automakers Ford (F) & General Motors (GM), and Japanese automakers Toyota Motor (TM) & Honda Motor (HMC).

Automakers in China, Korea, Malaysia and Taiwan are allocated 18% of the ETF's assets.

Global X Auto ETF - VROM

Global X Auto ETF (VROM) based on S-Network Global Automotive Index includes stocks of the 50 largest companies in the auto industry. Currently automakers, auto parts companies, and tire makers make up 74%, 19%, and 7%, respectively of this ETF.

Global X Auto ETF includes many of the automakers in the First Trust Auto ETF. Additionally, the Global X Auto ETF features automaker Tata Motors (TTM), auto parts makers Johnson Controls (JCI) & Magna International (MGA), and tire maker Goodyear Tire & Rubber (GT).

Capping off individual country allocation at 25%, Global X Auto ETF currently invests nearly 80% of its assets in developed markets. Emerging market autos and auto parts companies make up the remaining 20%.

AlphaProfit Take on Auto ETFs

The long-term future of the auto industry appears bright particularly in emerging markets. Wards Auto projects global auto sales to increase by 38% to 107 million units in 2020 from about 77 million units in 2011. While sales are expected to increase about 5% in the developed world, they are forecasted to grow between 60% and 160% in the individual BRIC countries.

As such, investments in auto ETFs are a play on consumer demand in emerging markets. While First Trust Global Auto ETF provides focused exposure to automakers, Global X provides broader exposure to auto, auto parts, and tire companies. In future, investors could have one more choice for auto ETFs with DireXion Funds having registered for one.

Like any sector ETF, one has to get the timing right with auto ETFs to avoid losses and earn outsized returns. These newly-introduced auto ETFs do not generate much enthusiasm from a timing perspective.

With auto stocks already up well over triple digits from the March 2009 bottom and monetary policies in emerging economies now getting tighter, the auto cycle appears to be closer to its top rather than its bottom.

Patient investors willing to wait until the bottom of the auto cycle can look to auto ETFs like First Trust Global Auto ETF and Global X Auto ETF to capture the next auto cycle upswing.

AlphaProfit ETF Model Portfolios and ETF Investment Newsletter

AlphaProfit's proven ETF selection process enables thousands of investors to thrive in turbulent markets.

ETF Model Portfolio Investment Process Selection - User Quotes

A dollar invested in the AlphaProfit's Aggressive Growth (ETF-Focus) and Capital Appreciation (ETF-Core) model portfolios is worth $45.65 and $22.58, respectively. This implies annualized returns of 20.2% and 16.2%, respectively.

Performance of ETF model portfolio driven by disciplined investment process
Performance of ETF model portfolio driven by disciplined investment process

Performance of ETF model portfolios as of September 30, 2014.

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Comparable investments in the Dow Jones Wilshire 5000 and S&P 500 benchmarks are worth $6.42 and $6.32, respectively implying annualized returns of 9.4% and 9.3%, respectively.

The ETF model portfolios use AlphaProfit's proven ValuM investment process for selecting investments. This process has enabled AlphaProfit model portfolios to bag Hulbert Financial's #1 rank numerous times.

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The chart above shows the actual performance of the ETF model portfolios since their launch in 2007. The performance shown before 2007 is the performance of AlphaProfit's ValuM investment process selections.

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AlphaProfit MoneyMatters is a free e-letter distributed to registered users of AlphaProfit's website. The e-letter analyzes the economy, markets, and sectors and provides money-making insights on stocks, exchange-traded funds, and mutual funds. AlphaProfit MoneyMatters is edited by Dr. Sam Subramanian acclaimed for his financial acumen and analytical skills.

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