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Unlike consumer staples, the consumer discretionary industry is highly sensitive to economic cycles (The Comprehensive Guide to Consumer Staples ETFs). 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 ETFs).
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 (GM - Analyst Report) led with a 18.1% market share in the U.S., followed by Ford Motor Co. (F - Analyst Report) with a 15.7% market share, Toyota Motors Corp. (TM - Analyst Report) came in with 14.4% market share, Chrysler-Fiat with a 11.5% market share, and Honda Motor Co. (HMC) and Nissan Motor Co. (NSANY) 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:
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 assets.
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 (VROM)
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 27.1% (Three Cyclical ETFs That Are Surging Higher).
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