First Trust Jumps Into Auto ETF Race

by on March 30, 2011 | ETFs Mentioned:

A few days after Global X filed details on a proposed Global Auto ETF, First Trust made an SEC filing that shed light on plans for a similar product. The First Trust NASDAQ Global Auto Index Fund would be linked ot the NASDAQ OMX Global Auto Index, a benchmark designed to track the performance of the largest and most liquid companies engaged in manufacturing of automobiles. In order to be eligible for inclusion in the index, companies must be classified as an automobile manufacturer. The filing also specified that eligible stock exchanges include all except those in a handful of countries, including China, Egypt, and the United States.

First Trust becomes at least the third issuer to lay the groundwork focusing on the automotive industry; in addition to Global X, Direxion has made an SEC filing detailing plans for a fund focusing on carmakers and related companies. There aren’t currently any exchange-traded products offering exposure to the automotive industry, a seemingly large hole in a coverage map that has expanded in recent years to include various sectors and sub-sectors of both the U.S. and global economies.

First Trust recently launched the NASDAQ CEA Smartphone Index Fund (FONE), one of the most narrowly-focused products to debut in the last several years. FONE has slowly gathered assets of about $14 million, perhaps demonstrating that there is now a market for products focusing on specific niches and sub-sectors. The early days of the ETF boom saw a number of hyper-targeted products go bust, including a suite of health care funds and products focusing on suppliers of Wal-Mart as well as homeland security companies [see ETF Hall Of Shame: Nine Exchange-Traded Debacles].

Auto ETFs Head-To-Head

With multiple car ETFs now waiting for the green flag, it will be interesting to see how the products stack up next to one another. The two most significant points of differentiation will likely be geographic focus and the extent to which funds focus on “pure play” auto manufacturers [Dude, Where's My Car ETF?].

While the auto industry is a cyclical business in the U.S., many emerging markets producers are experiencing tremendous growth as car ownership rates skyrocket. Ongoing urbanization in India, China, and other developing economies is resulting in more and more individuals owning automobiles. Many Chinese carmakers, for example, are reporting huge jumps in earnings; China’s overall auto sales rose more than 32% in 2010, though that pace is expected to slow to 10%-15% this year. Still, that rate of expansion far exceeds the mature markets of the U.S. and Western Europe.

It will also be interesting to see how auto ETFs spread exposure across various components of the automotive industry. One option would be focusing exclusively on companies that manufacture automobiles, while a more liberal interpretation of the industry may include tire manufacturers, makers of “tier two” components, and other firms that aren’t directly involved in assembling cars. Fidelity already offers an auto-focused mutual fund (FSAVX) that includes exposure to Toyota, Ford, Honda, and other manufacturers as well as parts suppliers. That mutual fund has more than $400 million in assets, suggesting that there is sufficient demand for exposure to the auto industry to support more than one car-focused ETF [see Global X Files For Car ETF].

First Trust didn’t include details on a ticker symbol or expense ratio in the recent filing.

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Disclosure: No positions at time of writing.