S&P Bullish on Auto ETF

Coming off a year in which in U.S. automobile sales climbed 13 percent, sales are expected to rise again in 2013 as the U.S. and global economies recover. More fuel-efficient vehicles and fresher styles are among the catalysts that some analysts see as driving robust auto sales this year.

"Our fundamental outlook for automobile manufacturers is positive," said S&P Capital IQ in a research note. "We see U.S. automotive demand trending higher on a year-over-year basis. Sales should benefit from widespread availability of and lower cost of credit for consumers. In addition, sales should benefit from an aging vehicle fleet that needs to be replaced and by consumers' desires for newer, more fuel efficient vehicles, and/or fresher styles and the latest in-vehicle technology."

That optimism has been reflected in the recent returns of major auto stocks. In the past 90 days, shares of Ford (NYSE:F), the second-largest U.S. automaker, have surged almost 24 percent. Shares of rival General Motors (NYSE:GM) are up more than 13 percent over the same time period.

Despite history of the automobile business in the U.S. and the industry's importance to the economy here, there is just one ETF devoted to the sector. That fund is the First Trust NASDAQ Global Auto Index Fund (NYSE:CARZ), which S&P has a Marketweight rating on.

CARZ, which debuted in May 2011, is reflective of the auto industry in that the ETF is global in its composition. Japan accounts for nearly 37 percent of the ETF's country weight with the U.S. and Germany combing for more than 34 percent. Germany and South Korea round out the fund's top-five country exposures and it is the global nature of CARZ that is worth keeping an eye on this year.

"While we expect to see uneven geographic progress, including declines in Europe and weakness in South America, we look for global demand to rise in 2013, led by China and the U.S. General Motors and Ford should see material losses again in 2013 from suffering European operations," said S&P Capital IQ. "We expect global sales volume growth to be in the low to mid-single digits in 2013. We think higher volume in the U.S. and abroad versus 2012 will outweigh European challenges, helping industry profits and cash flows."

S&P Capital IQ has four-star ratings on Ford and GM, the largest and tenth-largest holdings in CARZ, respectively. Other top-10 holdings in CARZ include Honda (NYSE:HMC), Toyota (NYSE:TM) BMW and Harley-Davidson (NYSE:HOG).

Regarding CARZ, S&P Capital IQ said: "When it comes to Performance Analytics, it is ranked overweight relative to other equity ETFs ranked by S&P Equity Research. However, based on Cost Factors it is categorized as underweight. Based on Risk Considerations it is ranked marketweight."

CARZ, which has $10.5 million in assets under management, has an expense ratio of 0.7 percent. The ETF has gained about 21.5 percent in the past three months.

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