Unlike consumer staples, the consumer discretionary industry is
highly sensitive to economic cycles (
The Comprehensive Guide to Consumer Staples
). At the time of recession when consumers lose confidence in the
economy, only necessities are taken into account and savings tend
to increase. Consequently, spending on consumer discretionary is
the first to drop.
Consumer discretionary involves expending the discretionary
income or disposable income on items that are not strictly
necessary. Examples include buying new cars, eating out at
restaurants and vacations.
At the time of recession, the stock prices of companies
supplying discretionary goods and services thereby tend to be low
or undervalued. Investors should take advantage of the situation
while buying undervalued discretionary stocks during times of
recession and selling them during a bullish phase or when the
economy recovers (
Play A Consumer Recovery With These Discretionary
We will highlight one segment of consumer discretionary industry
that looks to be both particularly sensitive to economic events and
beaten down over the past one year period; the automotive sector (
Which Auto ETF Should You Take For A Ride?
In January-June 2012, General Motors Company (
) led with a 18.1% market share in the U.S., followed by Ford Motor
) with a 15.7% market share, Toyota Motors Corp. (
) came in with 14.4% market share, Chrysler-Fiat with a 11.5%
market share, and Honda Motor Co. (
) and Nissan Motor Co. (
) took up the last two spots among the top 10, with 9.6% and 7.9%
market shares, respectively.
Auto Industry Outlook
Due to a massive structural change after the global economic
meltdown of 2008, the global auto industry is expected to be ruled
by automakers and suppliers based in the six major auto markets:
China, India, Japan, Korea, Western Europe and the U.S. (
If China Slumps, Avoid These Three Country ETFs
The Big Three Detroit automakers (GM, Ford and Chrysler), who
command a big chunk of the U.S. auto market, bounced back with help
from strong demand in foreign locations. They restructured their
product portfolios and responded to strong pent-up desire for more
and newer automobiles both at home and abroad.
However, despite some of these recent positives, a few are
worried that the relatively cyclical sector could face some
significant trouble in the months ahead. This could be especially
true if foreign markets remain under pressure or if America slumps
back into a double dip.
In either of these cases, investors could see some serious
volatility in the auto market, suggesting that a basket approach
could be the way to play the sector with lower levels of risk.
Below, we highlight two automotive ETFs which offer up broad
exposure to a number of companies in the space and could be
interesting choices, either long or short, for investors who are
once again focused in on the car market:
First Trust NASDAQ Global Auto Index Fund (
CARZ tracks the NASDAQ Global Auto Index which looks to evaluate
firms in the automotive industry based on a variety of data inputs.
The index looks to do this by including companies with the
following three features- companies have to be listed on a global
exchange, have a market cap of at least half a billion, and trade
more than $1 million in volume for a three month period.
This approach produced this fund that has total holdings of 35
stocks, assets under management of $4.6 million and trades in
volumes of 1,382 per day (
Guide to the 25 Most Liquid ETFs
Currently, the fund has most exposure in large cap securities
with a very small proportion invested in mid cap and small cap
securities. From an individual security perspective, the fund is
pretty concentrated with top 10 holdings making up 60% of the total
Top holdings include Honda, Toyota and Daimler AG. The
fund charges an expense ratio of 70 basis points and it should be
noted that the fund has performed terribly in the past one year
period, delivering a negative return of 28.3%.
Given the promising trends for cyclical stocks at this time,
some investors may want to consider buying into this automotive ETF
in the short term. If the economy continues to rebound, we could
see further gains in the media automotive space making this a
potentially good time to get into this surging sector.
Currently, CARZ has a Zacks ETF Rank of 4 or 'Sell'
Global X Auto ETF (
Another fund which investors can consider for exposure to the
automotive industry is VROM which tracks S-Network Global
Automotive Index. This benchmark is a modified cap weighted index
of publicly traded companies engaged in the production of
automobiles, automobile parts, tires, and related activities.
It includes the fifty 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.
VROM provides exposure to a somewhat larger basket of automotive
companies than its First Trust counterpart. The fund holds a total
of 53 automotive companies with assets under management of $2.3
million and a volume of 1,300.
Like its competitor, the fund also appears to be concentrated in
the top 10 holdings with 55% of assets invested in these
securities. From individual company perspective Toyota, Daimler AG
and Ford take the top three positions.
The fund charges 5 basis points less in expenses than CARZ and
over the past one year period it has delivered a negative return of
Three Cyclical ETFs That Are Surging Higher
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FT-NDQ GL AUTO (CARZ): ETF Research Reports
FORD MOTOR CO (F): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
TOYOTA MOTOR CP (TM): Free Stock Analysis
GLBL-X AUTO (VROM): ETF Research Reports
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