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Auto ETFs to Watch on Dismal September Sales

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Despite impressive Labor Day holiday spending, major automakers posted a decline in auto sales last month. Only two of the six major American and Japanese automakers registered rise in sales, as per Autodata. Though auto sales declined for the fourth time in the last nine months, it’s expected to end the year on the higher side.

September Auto Sales in Focus

According to the Autodata report, light-vehicle sales in the U.S. declined 0.7% last month to 1.43 million units from the year-ago period. Moreover, sales on a seasonally adjusted annualized rate (“SAAR”) basis declined from the year-ago level of 18.04 million units to 17.74 million units in the month. However, it was higher than August’s sales figure of 16.97 million units. Despite the decline in overall sales, product segments like light trucks continued to record strong sales.

It is speculated that a strong increase in incentives helped automakers register higher sales in September compared with the previous month. According to J.D. Power, incentives surged nearly $400 a vehicle last month compared with the year-ago level. Moreover, it also stated that last month’s per unit average incentives of $3,888 was even higher than the record incentive level in Dec 2008 (read: CARZ ETF in Focus on Decline in Auto Sales in August).

Sales of Major Automakers

Among the major U.S. automakers, General Motors’ GM vehicle sales declined 0.6% from the year-ago level to 249,795 units in September. However, retail sales improved 0.3% to 204,449 units. Meanwhile, Ford Motor Co. F reported a year-on-year decrease of 7.7% in U.S. sales to 204,447 vehicles last month. Though sales volume of the Lincoln brand vehicles were up 1.3% year over year to 8,797 units in the month, sales of the Ford brand declined 8.1% year over year to 195,650 vehicles. Separately, FCA US LLC – controlled by Fiat Chrysler Automobiles FCAU – recorded a 1% year-over-year decline in sales to 192,883 vehicles in September.

However, Japanese automakers delivered better sales numbers compared to their U.S. counterparts. Among the top three Japanese auto companies, both Toyota Motor Corporation (TM - Free Report) and Nissan Motor Co. Ltd. NSANY registered an increase in auto sales last month. Growth of 1.4% in the Toyota division and 2% improvement in Lexus’ sales led the company to record a 1.5% year-over- year increase in sales to 197,260 units last month. Moreover, Nissan Motor reported a 4.9% year-over-year rise in sales to 127,797 vehicles in September (read: Car ETF in Focus Post Upbeat Auto Earnings).   

However, Honda Motor Co., Ltd. HMC registered a year-on-year decline of 0.1% last month to 133,655 vehicles. Though sales at the company’s Acura Division fell 12.9%, sales in the Honda Division improved 1.5% to a September record of 120,842 units.

Will Sales Rebound?

Though most of the analysts believe that auto sales in 2016 may come in below last year’s record level, it is also anticipated that the auto industry will manage to register healthy growth this year. Many analysts believe that U.S. auto sales are reaching a plateau. In the nine months ended Sep 2016, sales inched up a mere 0.3%. It is also expected that the pressure to maintain the attractive incentives and deals may strain the margins for automakers. However, major automakers sounded positive about the outlook for the industry in the near future (read: Acquisition Talks Boost SolarCity;Hit Tesla: ETFs in Focus).

For instance, the chief of the U.S. Toyota brand division, Bill Fay said: “I would hope for a strong fourth quarter where there are a lot of reasons for people to buy.” He also added: “Industry sales in 2016 remain in line with last year's record levels.” Separately, GM Chief Economist Mustafa Mohatarem also remained confident about the bright prospects of the auto industry in the coming months. In an interview, Mohatarem said: “I don't see any downturn in the U.S. economy any time soon.”

High employment levels, rising personal income, low fuel prices and easy availability of credit are some factors that have been driving sales. Moreover, the high average age of cars on the U.S. roads should continue to boost replacement demand. 

Auto ETF in Focus

First Trust NASDAQ Global Auto ETF CARZ tracks the NASDAQ OMX Global Auto Index and has exposure to automobile manufacturers across the globe. The product holds 33 stocks in its basket with General Motors, Ford, Toyota and Honda placed among the top five holdings with a combined allocation of nearly 31% of fund assets. Nissan Motor is also placed in the top 10 holdings with 3.9% asset allocation. In terms of country exposure, Japan takes the top spot at 33.8% while the U.S. takes the second spot with 23% allocation. Germany and South Korea come next with 19.3% and 7.6% allocation, respectively (see all Consumer Discretionary ETFs here).

The ETF is neglected with $21.5 million in AUM and sees light trading volume of around 6,100 shares. The product is a bit expensive with 70 bps in annual fees and currently has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook. The ETF has lost 3% over the past one-month period.

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