Dude, Where’s My Car ETF?

by on August 18, 2010 | ETFs Mentioned:

The economic recovery that has breathed life back into equity markets after the most recent recession seems to be balancing on a knife’s edge. Corporate earnings reports have been solid, but a frustrating lack of job creation looms over every trade on Wall Street, standing as a major obstacle to ongoing economic growth. In recent months pessimism has grown more intense and the bears have come out of hibernation, as more and more investors have upped the likelihood of a double dip recession and tempered expectations for the remainder of 2010.

Against this uncertain backdrop, a corner of the economy once left for dead is staging an unimaginable comeback. Believe it or not, the U.S. auto industry is booming. Factory output jumped in July thanks largely to a surge in output of vehicles and auto parts, which increased 9.9% according to data released by the Federal Reserve this week.

That report came after Detroit recently wrapped up an encouraging earnings season. Ford Motor Company had earlier reported profits of $2.6 billion for the three months ended June 30, while Chrysler Group LLC notched its second straight quarter of positive operating profit. General Motors topped things off by delivering a quarterly profit of $1.3 billion. That marked the second consecutive profitable quarter after consistently reporting losses for more than two years.

The auto industry has emerged from its painful restructuring process with lower break-even points, meaning that that Detroit is able to make money even when tough economic environments keep prices down. Moreover, operations outside of the U.S. have exploded in recent years, thanks to a rapidly-expanding middle class in much of the developing world. GM expects to sell more than two million cars in China in 2010 after selling a record 1.83 million in 2009. Highlighting the importance of Chinese operations to the company’s operations, GM recently moved the headquarters of its international operations to Shanghai.

President Obama recently embarked on a tour of the Midwest to tout the success of the auto industry’s turnaround. “We are heading in the right direction,” Obama said at a Ford plant in Chicago. “We are moving forward. The industry isn’t just on the way back; it’s on its way to being number one again.” Obama has reason to celebrate Detroit’s dramatic change of fortunes: with GM preparing to file for perhaps the largest IPO in history, the government (which owns about 60% of the company) stands to finally begin recouping its bailout/investment in the auto industry.

Playing The Auto Industry Through ETFs…Or Not

This is where we’d normally run through the ETF options for investors looking to make a play (either long or short) on the automotive industry. But in this case, there aren’t any. That’s right, somehow the industry that has brought to market dozens of hyper-targeted sector funds–including such classics as the Autoimmune-Inflammation HealthShares ETF and the Homeland Security Index Fund–hasn’t come up with an ETF offering exposure to the classic American industry [see ETF Hall of Shame: Nine Exchange-Traded Debacles]. Investors in the U.S. have access to ETFs covering the gaming industry, shipping firms, and semiconductors (there are at least three of those), but nothing devoted to the ultimate consumer product.

Existing ETFs offering exposure to planes (FAA) and trains (IYT) have seen significant interest (aggregate assets stand at $550 million). There’s even an ETF with heavy exposure to Greek shipping firms (SEA). But ETF options for cars are non-existent. For an industry that is rolling out hundreds of new products each year offering exposure to increasingly exotic markets and investment strategies, there is at least one glaring hold in an otherwise comprehensive coverage map [use the new Country Lookup Tool to find ETFs with exposure to any major economy].

Even including publicly-listed carmakers overseas (such as India’s Tata and China’s “big five”), one would be hard pressed to come up with a well-diversified index comprised entirely of companies engaged in the final production of automobiles. But it would be relatively simple to come up with a list of companies involved in various levels of the automotive industry, including tier two and tier three manufacturer (such as Autoliv, Delphi, TRW, etc.), tire manufacturers (Goodyear, Cooper), and various other activities. If you’re not convinced, take a look at the holdings of the Select Automotive Portfolio Mutual Fund (FSAVX).

A car ETF might not get a lot of love from long-term buy-and-holders; even after the impressive rally the industry faces a very uncertain future. But odds are it would be a big hit with more active investors who measure their holding periods in days and weeks; the volatility of the automotive industry provides opportunities to make a nice profit in a relatively short period of time. Moreover, trading activity would likely surge around the already highly-anticipated release of monthly sales reports.

It’s worth noting that there has been some progress made on this front; Direxion filed for approval earlier this year on an ETF that would be linked to the Indus Global Auto & Auto Suppliers Index, a benchmark that consists of approximately 30 companies engaged in the manufacturing, maintenance, or retailing of automobiles listed in the U.S., Germany, India, Japan, and Sweden (among others). Stay tuned to see if that concept ever becomes a reality.

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Disclosure: No positions at time of writing.