5 Reasons Global Auto ETF Speeding Past The Market


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First Trust NASDAQ Global Auto Index ( CARZ ) raced ahead 22% the past three months, leaving theSPDR S&P 500 ETF ( SPY ) in the dust with a 6% gain. On a one-year basis, CARZ gained 18%, not much faster than 16% for SPY. The ETF holds 35 stocks of auto makers from 10 countries valued between $500 million and $161 billion.

Here's an overview of five catalysts driving this ahead of the pack.

1. Consumers are buying cars at a healthy clip although they're far below pre-recession levels.

The U.S. SAAR (seasonally adjusted annual rate of sales) rose steadily from a rate of about 14 million in July to about 15.5 million in November and December, Credit Suisse analysts noted in a "2013 Auto Sector Outlook" released Jan. 11. That's gaining on the 16.15 million vehicles sold in 2007.

Consumers bought about 78.8 million cars globally in 2012, up 4.4% over the prior year, according to Moody's. The economic research firm estimates 81.1 million will be purchased this year, good for 2.9% growth. Sales are expected to dip in Western Europe and Japan by 3% and 9.1%, respectively. Sales are projected to rise in the U.S. and China by 3.6% and 8.5%, respectively.

2. China is underpenetrated and presents a massive growth opportunity for car makers.

In the People's Republic, there are only 70 vehicles per 1,000 people -- one-tenth the average of the seven largest economies, according to Scotiabank's Global Auto Report issued in December. What's more, more than one-quarter of the world's key vehicle-buying age group -- 40-49 years old -- live in China. They have the most disposable income and their share of the population is expected to reach 17.4% by 2015, up from 13.5% in 2005.

"Furthermore, a recent study estimated that 66 million Chinese households will be able to buy a new car by 2013 -- a level 50% above the number of cars currently on the road in China," Scotiabank's report stated.

3. The inventory-to-sales ratio is rather low compared to its historic average.

From 2003-2008, the motor vehicle manufacturer inventory-to-sales ratio averaged approximately 2.62, according to Briefing.com's chief economist Jeffrey Rosen.

At current inventory levels, the inventory-to-sales ratio would drop to 2.06 if production levels remain at 2012 levels this year and sales rise to 15.3 million as forecasted. For the inventory-to-sales ratio to its pre-recession average of 2.62, U.S. auto makers have to boost production by 4.6% -- or 705,000 vehicles -- from 2012 levels. Growth rates will likely remain flat atGeneral Motors ( GM ),Honda ( HMC ) andToyota ( TM ) butFord (F) and Chrysler will have to lift output significantly to bring inventory-to-sales ratios to their historic norms.

4. CARZ may be considered a value play for investors focused on price ratios. CARZ trades at price-to-forward earnings ratio of 10 vs. 13 for the SPY, according to Morningstar. CARZ trades at 1 times book value, 0.4 times sales, 4.6 times cash flow while yielding 1.4%. By contrast, SPY trades at 2 times book value, 1.3 times sales, 7 times cash flow while yielding 2.25%. CARZ also trades at cheaper valuations than industrials on average.

5. Worries over Europe's economic woes have dissipated. GM and Ford said losses in Europe would be no worse in 2013 than 2012, according Credit Suisse. And the fiscal cliff "resolution" has driven investors in riskier assets.

Investment Risks

"With sentiment getting overheated," Credit Suisse analysts see the auto sector hitting the brakes over the next month or two. They see companies issuing cautious 2013 guidance as the sales boost from people having to replace their cars following the Superstorm Sandy wears out and worries over the U.S. spending cuts and the debt ceiling debate weighs on the market.

"If we are right about a correction for the group, investors may want to be tactical about entry points and/or trading around existing positions," Credit Suisse analyst Christopher Ceraso and his colleagues wrote. "For the stocks to move much higher, investors have to either willingly overpay for the near-term production environment (something that hasn't happened since we've been doing this analysis), or expectations for North American or European production have to move higher."

Top 10 Holdings in First Trust NASDAQ Global Auto ETF and Percentage of Assets (as of 1/18/2013)

Ford Motor 8.71%

Daimler (DDAIF) 8.26

Honda Motor 8.15

Toyota Motor 7.86

Hyundai Motor (HYMLF) 6.85

Renault (RNSDF) 4.10

Porsche Automobil Holding 4.02

General Motors 4.00

Suzuki Motor (SZKMF) 3.98

Harley--Davidson (HOG) 3.92

Follow Trang Ho on Twitter: @TrangHoETFs .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: CARZ , GM , HMC , SPY , TM

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