Market Overview

Checking in: Jumper Cables Needed


For so long, many ETF pundits lamented that there were no ETFs devoted to the auto industry available to U.S. investors. That changed earlier this with the debut of the First Trust Nasdaq Global Auto Index Fund (Nasdaq: CARZ). Global X quickly followed suit with the Global X Auto ETF (NYSE: VROM).

The First Trust Nasdaq Global Auto Index Fund is the subject of this week's “Checking In” segment and as has been the case with many of the ETFs that have occupied this space in recent weeks, we can say beyond a shadow of a doubt that this new fund's timing could have been better.

In all fairness, same goes for VROM and no ETF issuer has a crystal ball, so how would they know global economic growth would slow substantially and fears of double-dip recession would return?

That means CARZ has been a wreck since its May debut. The ETF has tumbled 25.5% since then compared to a 15% slide for the S&P 500. Just to be fair, it should be noted the Global X Auto ETF is down by the same amount as VROM since its debut.

CARZ has attracted just over $3.3 million in assets under management since its May introduction and that total can be looked at one of two ways. Either its impressive considering the market has been in the tank for a good part of CARZ's life span or it's disappointing when considering an auto industry ETF was eagerly anticipated for so long.

Based on CARZ current share price of $22.32 and rounding its average daily volume up to 3,400 shares, the ETF would have monthly trading volume in dollar terms of just over $1.5 million and that's probably enough to keep it afloat for a while. If that's still the case two years from now and the expense ratio remains at 0.7%, this ETF may not last two more years beyond that.

That bring us to the common sense point regarding CARZ. This is an ETF where more than a quarter of its weight is devoted to Toyota (NYSE: TM), Honda (NYSE: HMC) and Ford (NYSE: F). Three companies that are extremely sensitive to the whims of global consumers. In turn, CARZ isn't just an auto ETF, it's more like a sub-sector consumer discretionary ETF.

Bottom line: Will CARZ and VROM survive and be with us in five years? At least one of them will. Is the idea behind an auto ETF valid? No doubt. Is CARZ a victim of macro factors like Europe, high unemployment and falling home prices? For sure. Overall, CARZ should be a good ETF. It just needs a good economy to reach that status.

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