Auto Sales Hit Fresh High In 2016: ETFs & Stocks To Ride On

For the auto industry, 2016 was another banner year as sales climbed 0.4% year over year to an annualized 17.55 million units, breaking an all-time record of 17.47 million vehicles in 2015. This was especially due to robust light-truck demand, fatty discounts and year-end incentives.

Six major American and Japanese automakers have reported mixed auto sales. While sales increased 5.4% for Nissan NSANY and 3.2% for Honda HMC, Toyota TM and General Motors GM saw a modest drop of 2% and 1.3%, respectively. Meanwhile, Fiat Chrysler Automobiles and Ford F reported almost flat sales year over year.

Strong consumer confidence, an accelerating U.S. economy, rising income and relatively low fuel prices will continue to drive the domestic auto industry. Notably, U.S. consumer confidence reached levels not seen in 15 years in December. Further, higher demand for sport utility vehicles, plethora of new models, fuel-efficient and technologically enriched vehicles, and the need to replace aging vehicles would lift car sales in 2017 (read: Ten Predictions for the ETF Industry in 2017).

Added to the strength is the job market, which is the most progressive area with the longest streak of overall job growth since the financial crisis and unemployment rate dropping to a nine-year low of 4.6%. This makes the investment case for the auto industry more tempting. Investment bank Morgan Stanley expects auto sales could grow 2–4% in 2017 while Germany’s Center for Automotive Research (CAR) also sees a 2% increase fueled by president-elect Donald Trump’s economic stimulus programs and tax cuts.

However, the industry could take a hit from Trump’s policies of potential tariff on vehicles imported into the U.S. from Mexico or any other change in trade policies (read: Trump Triumphs: Stocks & ETFs to Rock or Shock).

Given the bullish fundamentals, investors may want to take a ride with encouraging auto ETFs and stocks in the New Year. For them, we have presented some of the attractive picks that are expected to perform well this year.

ETFs to Buy

First Trust NASDAQ Global Auto ETF CARZ

This fund offers 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 top 10 holdings with about 60.8% of assets. In terms of country exposure, Japan takes the top spot at 33.8% while the U.S. and Germany round off the next two spots with 23.2% and 19.9% share, respectively. CARZ has a lower level of $22.4 million in AUM and trades in a small average daily trading volume of about 5,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank of 3 (Hold) with a High risk outlook, suggesting room for upside.

iShares Global Consumer Discretionary ETF RXI

While RXI provides broad exposure to the consumer discretionary space around the world, investors could go for this product as it has nearly 22% allocation to the auto industry. Holding 176 stocks, the fund is skewed toward the top firm at 7.8% while the other firms hold less than 4.6% share. American firms make up for 61.4% of the portfolio while Japan takes the next spot with a double-digit allocation. It has $338.7 million in AUM and charges 47 bps in annual fees. Average daily volume is light at around 19,000 shares (read:5 Top-Ranked Consumer Discretionary ETFs to Buy Now).

First Trust Consumer Discretionary AlphaDEX Fund FXD

This fund also targets the broad consumer discretionary segment with at least 10% allocation to the auto industry. It holds 118 securities in its basket with each holding less than 1.9% of assets. It has amassed $585.3 million in its asset base and trades in solid average daily volume of roughly 704,000 shares. It charges 61 bps in annual fees from investors and has a Zacks ETF Rank of 2 (Buy) with a Medium risk outlook.

Stocks to Buy

We have used our Zacks stock screener to find out the best stocks in the auto space having a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Style Score of ‘B’ or better.

The Goodyear Tire & Rubber Company GT

Based in Akron, Ohio, Goodyear Tire & Rubber is one of the world's largest tire companies engaged in the manufacture of tires, engineered rubber products and chemicals in facilities in numerous countries. The company has seen positive earnings estimate revision of a couple of cents for 2016 over the past 60 days, representing year-over-year growth of 17.43%. The stock has a Zacks Rank #2 and a VGM Style Score of B.

China Automotive Systems Inc. CAAS

Based in Jing Zhou, China Automotive manufactures and sells automotive systems and components in the People’s Republic of China. Though the company’s earnings are expected to drop 15.3% in 2016, it saw solid earnings estimate revision of eight cents over the past 60 days. It has a Zacks Rank #2 and a VGM Style Score of A (see: all the Consumer Discretionary ETFs here).

SORL Auto Parts Inc. SORL

Based in the Ruian District of Wenzhou City, Sorl, Auto Parts specializes in the development, production and distribution of air brake valves and hydraulic brake valves. While no earnings estimate revision was seen over the past 60 days, the company’s earnings are expected to grow 8.7% for 2016. The stock has a Zacks Rank #2 and a VGM Style Score of A.

Bottom Line

An improving economy and increased consumer confidence will continue to drive auto sales higher in the coming months, making the above-mentioned ETFs and stocks compelling choices for investors to play in 2017.
 

Disclosure: None.

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