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Robust August US auto sales, but what's ahead for car ETF?

August has turned out to be yet another auspicious month for the U.S. auto industry on the back of strong sales led by a gradually improving economy. In fact, August 2014 auto sales increased to their highest level in 8-1/2 years.

This is especially true as new car sales came in better than expected and increased 5.5% year over year to 1.59 million vehicles, lifting the seasonally adjusted annual rate to 17.53 million units, the highest level since January 2006. Zero-percent financing offers, higher cash incentives, improving consumer confidence and strong demand for trucks and sports utilities are some of the factors that supported the strong sales growth.

Auto Sales in Focus

All the automakers save General Motors (GM) and Volkswagen (VLKAY) reported a year-over-year jump in sales. However, Chrysler stole the show with a 20% increase in year-over-year sales driven by strength in its Jeep SUVs and Ram pickup trucks.

Sales for Ford Motor (F), Toyota (TM), Nissan (NSANY) and Honda Motors (HMC) were up 0.4%, 6.3%, 11.5% and 0.4%, respectively. Strong sales for Rogue crossover SUV led to double-digit growth for Nissan, while RAV4 SUV drove sales for Toyota.

However, sales of General Motors saw a small year-over-year decline, while Volkswagen suffered the largest 12.8% year-over-year drop. Slip in sales for Cadillac and Buick brands led General Motors to report lackluster sales.

What’s Next?

Most of the U.S. auto makers and dealers expect the robust sales trend to continue for the remaining part of the year and even during 2015. Robust manufacturing, growing employment, falling energy prices, rising business investment and consumer confidence are expected to support this uptrend.

How to Play?

While looking at a number of auto stocks is a solid way to play this trend, investors can obtain a global exposure to this space with the First Trust Nasdaq Global Auto Index ETF (CARZ).

The ETF tracks the Nasdaq OMX Global Auto Index, giving investors exposure to automobile manufacturers across the globe. The product holds 37 stocks in the basket and is highly concentrated in its top five holdings with more than 40% of assets going to these five firms.

The ETF has a definite tilt toward large cap stocks as these account for 89% of assets. Ford occupies the top spot, followed by Toyota, General Motors and Honda.

In terms of country exposure, Japan takes the top spot at 35.4%, followed by U.S. having 25.1% allocation and Germany 17.4%.

The ETF seems to be unpopular with an asset base of $65.7 million and sees light trading volume of roughly 12,000 shares a day. The product seems to be slightly expensive with 70 bps in annual fees with a dividend yield of 1.21%.

Though the short-term outlook for the auto ETF is encouraging, the long-term prospect remains somewhat bleak given a Zacks ETF Rank of 4 or ‘Sell’ with a High risk outlook. This suggests that the fund might be due for some correction, as the strengthening U.S. economy has raised concerns over an earlier-than-expected interest rate hike.

Moreover, many industry experts signal caution in the face of rising inventories at a time when the prices of pre-owned cars are slumping and auto makers are increasing capacity. Also, let’s not forget that four of the largest eight automakers saw either declining or lackluster sales, so caution definitely still needs to be taken for this space. 

GENERAL MOTORS (GM): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
HONDA MOTOR (HMC): Free Stock Analysis Report

TOYOTA MOTOR CP (TM): Free Stock Analysis Report
FT-NDQ GL AUTO (CARZ): ETF Research Reports
 
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Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.

Zacks Investment Research

Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.