ETF Talk: Catch a Lift with an Auto Manufacturing Fund

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

The continued worldwide unemployment burden has reduced consumer spending and left investors seeking undervalued bargains in the stock market. One intriguing contrarian trend that I have noticed is increased global demand for newer, more fuel-efficient automobiles. As a result, many automobile manufacturers, automobile parts, tires, and other related auto components companies are boosting production and sales. The Global X Auto Exchange Traded Fund (VROM) is an exchange-traded fund (ETF) that I have identified, in case you are interested in benefiting from a rebounding global auto industry.

Positive forecasts indicate that profits for these types of auto industry companies will continue to gain momentum through 2014. Currently trading just below net asset value, VROM closed at $12.53 yesterday, Aug. 7. VROM began the year slightly below that mark by closing at $12.16 on January 3, 2012, before climbing to close at $14.69 on Feb. 24. The fund is up 3.04% year-to-date, after Toyota Motor Corp. (TM), the fund’s largest holding, raised its 2012 sales forecasts on Aug. 3.

The Global X Auto Exchange Traded Fund (VROM) seeks to mirror investment results that correspond to the price and yield performance of the S-Network Global Automotive Index. VROM, with $2.5 million in net assets, has 56.95% of its funds invested in its top 10 holdings, as of Aug. 7. Those 10 largest holdings are: Toyota Motor Corp. (TM), 12.04%; Daimler Chrysler (DDAIF.DE), 9.44%; Ford Motor Corp. (F), 7.05%; Hyundai Motor Co. Ltd. (005380.KS), 5.79%; BMW AG (BAMXF.DE), 5.10%; Honda Motor Co. Ltd (HMC), 4.99%; Johnson Controls (JCI), 3.52%; Hyundai (005380: KS), 3.24%; Kia Motors Corporation (KIMTF), 3.00; and General Motors Co. (GM), 2.78%.

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Economic weakness in Europe has hurt automobile sales in that region, but growth is occurring elsewhere. VROM’s current share price should reflect known factors, such economic weakness in Europe, in the United States and in parts of Asia. Thus, any positive news, including the possible election of a pro-business U.S. president, fiscal discipline in debt-ravaged nations and easy-money policies of central banks around the world, would be good for the fund. As a result, it is a fund that you may want to keep in mind if you foresee a robust recovery in the automobile sector in the months ahead.

In addition, news of weakened economic growth in the United States has had little impact on auto sales as a whole. According to the National Automotive Dealer’s Association, U.S. auto sales in July 2012 rose to 1.15 million units, an 8.9% increase when compared to sales in July 2011. Year-to-date sales through July 2012 hit 8.40 million, up 14.0%, compared to the same period of 2011, according to the association. With auto-industry growth expected to continue into 2014, VROM should have an open road ahead of it.

Keep in mind, VROM is not without risk. As an industry-specific fund, VROM lacks broad diversification and leaves investors open to performance fluctuations from expansions or contractions in the auto industry. Also, VROM’s total annual operating expense rate of 0.65% is slightly higher than the average exchange fund expense ratio of 0.45%. You may still want to invest in VROM, but do so with your eyes open and aware of the potential hazards along your investment journey.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.

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