CARZ First Trust SNetwork Future Vehicles and Technology ETF II

One sector of the economy that has begun to hold steady despite the broad economic malaise is the automotive industry. Car sales have trended above a seasonably adjusted annual rate of over 10 million units for several months now, suggesting the uptrend in the sector is not a fluke or a one month aberration for the American market. Additionally, although there are concerns over Chinese growth, the country is still the biggest car market in the world with over 18.5 million units sold in 2011. Given the low penetration of cars in the country—auto ownership is below 50 per 1,000 people— more sales aren’t unreasonable to assume even if the growth rate of the country as a whole slows down considerably in the near future.

Furthermore, for investors who believe that the economy will rebound in 2012, a greater allocation to cyclical sectors—such as those in the consumer discretionary space—could be the way to go in order to see big gains. While allocations to single companies are very possible and easy in the equity world, a very recent look at the sector suggests that fortunes can vary wildly among the components in the space and that some firms can surge and others can falter in a very short period of time (read Three Low Beta Sector ETFs). Thanks to this, a more diversified approach could be ideal for investors who don’t have a strong opinion on any of the Big Three American firms or some of the top producers coming out of the Japanese or Korean markets (read India ETFs Behind The Crash).

Additionally, a great deal of the growth seems to be coming from emerging nations so it only makes sense to allocate more assets to those corners of the sector, or at least to firms with higher levels of exposure to the space. Since many of these firms do not trade on American exchanges, a closer look at a car ETF may be the way to go. Luckily for those looking to make a play on the space, there are two global funds which put assets to work in the car industry. While both have a great deal of similarities, there are a number of key differences that investors need to be aware of before choosing between the two. In light of this, we highlight in greater detail below the two automotive ETFs and some of the key differences between these two upstart funds:

First Trust NASDAQ Global Auto Index Fund (CARZ)

This ETF tracks the NASDAQ OMX Global Auto Index which is a modified market-cap weighted index that includes securities classified as automobile manufacturers. In order to be included, 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 average period. The index also includes caps to prevent a few firms from dominating the index which is rebalanced quarterly and reconstituted on a yearly basis (read Ten Best New ETFs Of 2011).

In total, CARZ holds 36 securities in total and charges investors 70 basis points a year in fees. The fund has the heaviest exposure to five firms which all make up at least 8% of assets; Ford (F), Daimler AG (DDAIG), Toyota (TM), Hyundai, and Honda (HMC). The P/E ratio on the fund is at a rock bottom 6.9 while the Price to Book comes in at just 0.95 suggesting deep value is in the component securities. This could be a result of the fund’s terrible performance over the past few months as CARZ has lost 21.6% in the past six month period.

Global X Auto ETF (VROM)

For another way to play the auto industry, investors could consider 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 strives to include 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 (also read Convertible Bond ETFs Head-to-Head).

VROM has heavier exposure to its top three holdings as Toyota (12%), Daimler (8.4%), and Ford (7.7%) take the top three spots in the basket, but the fund rounds this out by holding more securities than its First Trust counterpart. Country exposure is also concentrated, as Japan, Germany, and the U.S. combine to make up nearly two-thirds of the total assets in the fund. This fund also has deep value characteristics as well, as the product’s basket has a P/E of just 8.2 but a slightly higher Price to Book of 1.2. Additionally, the fund has seen a slightly worse performance over the past six months—down 22.2%-- although it does have better volume and lower expenses than its First Trust counterpart.

 



Category	CARZ	VROM
Expenses	0.70%	0.65%
Volume	2,600	6,500
Assets in top ten	60.7%	57.8%
Return (past six months)	-21.6%	-22.2%
U.S. Equities	17.0%	23.4

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FORD MOTOR CO (F): Free Stock Analysis Report
 
HONDA MOTOR (HMC): Free Stock Analysis Report
 
TOYOTA MOTOR CP (TM): Free Stock Analysis Report
 
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