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ETF News And Commentary

The auto industry seems to be faltering this year with sales plummeting again in March, representing the third consecutive monthly decline. Car sales slipped 1.6% year over year to 1.55 million vehicles, per Autodata Corp.

Seasonally adjusted annual sales fell to 16.62 million vehicles, down from 17.6 million reported in February and the market expectation of 17 million. This indicates a sluggish start to the spring selling season and that the sizzling industry has started to cool-off after record two years of growth.

Among the six major American and Japanese automakers, Ford Motor (F - Free Report) recorded the biggest drop of 7.5%, followed by declines of 5% for Fiat Chrysler (FCAU - Free Report) , 2% for Toyota (TM - Free Report) and 1% for Honda (HMC - Free Report) . The other two – Nissan (NSANY - Free Report) and General Motors (GM - Free Report) – saw an increase of 3.2% and 1.6%, respectively, in sales. Ford has a Zacks Rank #5 (Strong Sell) while the other five automakers have a Zacks Rank #3 (Hold).

The disappointing numbers came on the back of increasing inventories especially of small cars and higher discounts. According to the TrueCar, manufacturer's incentives rose 14% to $3887 per automobile, up from February's tally of $3587 per car. Headwinds like chances of higher interest rates and growing vehicle stockpiles continued to weigh on demand for new cars. Additionally, the industry is expected to take a hit from Trump’s policies of “big border taxes” on imported vehicles (read: Is the Auto ETF Headed for a Trump Bump or Slump?).

Market Impact

Soft sales not only hit hard automakers but also shook the entire auto industry. In particular, auto parts were the worst performers with small cap stocks leading the plunge. Notably, Gentherm Inc. (THRM - Free Report) skidded 7% while American Axle & Manufacturing Holdings Inc. (AXL - Free Report) declined 6.2% at the close. The former has a Zacks Rank #3 while the latter has Zacks Rank #1 (Strong Buy).

Some well-known players like O'Reilly Automotive (ORLY - Free Report) , CarMax (KMX - Free Report) , AutoNation (AN - Free Report) , AutoZone (AZO - Free Report) , and Genuine Parts GPC tumbled 4.1%, 4.3%, 3.4%, 3.1%, and 2.2%, respectively. ORLY, AZO and GPC have a Zacks Rank #3 while KMX and AN have a Zacks Rank #4 (Sell).

The lone auto ETF – First Trust NASDAQ Global Auto ETF CARZ – also saw rough trading, losing 0.7% at the close on the day. It offers a pure play global exposure to 33 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is a large cap centric fund with high concentration on the in focus four firms – Honda, Toyota Motor, General Motors and Ford – which account for over 7% share each. CARZ has a lower level of $20 million in AUM and trades in a small average daily trading volume of about 9,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank of 3 with a High risk outlook, suggesting room for upside (see: all the Consumer Discretionary ETFs here).

Favorable Outlook

Despite the slide, the current trends are still favorable for automakers given that the U.S. economy is clearly on solid ground thanks to an impressive labor market, rising wages, slowly rising inflation and increasing consumer spending. Americans have an optimistic view about the economy with confidence soaring to a more than 16-year high. Further, higher demand for trucks and SUVs, a plethora of new models, fuel-efficient and technologically enriched vehicles, and the need to replace aging vehicles would lift car sales in the coming months (read: How Consumer ETFs Crushed the S&P 500 Bull Market Run).

Moreover, the auto sector has a solid Zacks Rank in the top 6% with half of the industries falling under this category having an industry rank in the top 12%. Notably, the sector valuation looks appealing at the current level with a P/E ratio of 12.96, the lowest of all the 16 Zacks sectors.

As such, investors could view the current data and the resulting fall in share prices of automakers as an entry point. An improving economy and increased consumer confidence will set the stage for a rebound in auto sales in the coming months.

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