While the U.S. auto industry may begin to taper off, foreign automobile makers could pick up the slack on a weaker U.S. dollar, supporting the global auto-sector exchange traded fund.
The First Trust NASDAQ Global Auto Index Fund (NasdaqGM: CARZ), which provides access to global automobile manufacturers, rose 11.9% over the past three months and was up 0.5% year-to-date.
Max Warburton, senior auto analyst at Sanford Bernstein, believes U.S. carmakers will have a harder time turning a profit ahead, reports Luke Kawa for Bloomberg.
In prior years, the U.S. car industry has enjoyed greater demand as cheap financing helped consumers buy new vehicles. Meanwhile, limited capacity has also bolstered the auto industry’s profitability.
However, Barburton warned that the ideal environment is beginning to change and potentially lead to greater competitive pricing that could threaten the industry’s profit margins. [A Less Discussed ETF Vulnerable to Higher Interest Rates]
“The excellent pricing environment in the US has been due to government intervention in 2008/09 that allowed dramatic cuts to capacity and reset pricing, “Warburton said. “We are convinced U.S. market profitability has peaked. Volumes can’t go much higher. Financing cannot get cheaper or longer duration. Substantial capacity increases in North America are imminent and will alter the favorable demand-supply balance.”
Meanwhile, foreign automakers, such as Japanese names, have not fully taken advantage of their weaker currencies, compared to the strengthening U.S. dollar. Consequently, Bernstein argues that foreign produces are better positioned to gain market share ahead.
“We believe industry earnings will soon decline,” the analyst told Bloomberg, forecasting a gradual dip in profitability for the U.S. auto industry. “Buying autos this late in the global economic cycle is arguably dangerous – precedents suggest the sector usually delivers most of its performance early in the cycle.”
U.S. automakers account for 23.5% of CARZ’s underlying weight, with top holdings including General Motors (NYSE: GM) 9.2% and Ford Motor (NYSE: F) 7.8%.
However, CARZ includes significant exposure to Japanese and European carmakers, which could benefit from greater export sales due to their weakening currencies against the U.S. dollar. CARZ includes a 37.4% tilt toward Japan, 23.6% in Europe and 8.1% South Korea.
First Trust NASDAQ Global Auto Index Fund
For more information on the auto industry, visit our automobiles category.
Max Chen contributed to this article.