Engine Troubles For The Auto ETF

The First Trust NASDAQ Global Auto Index Fund (First Trust Exchange -Traded Fund II CARZ), the lone exchange-traded fund dedicated to automotive manufacturers and related companies, needs to see a mechanic.

CARZ is down nearly 11 percent year-to-date, while the largest consumer discretionary ETF is higher by 3 percent.

Is CARZ Zooming Or Stalling?

The auto ETF has been confounded by currency issues, among other headwinds. For example, Japan is the ETF's largest country weight at 35.5 percent and four of the fund's top 10 holdings are Japanese firms, including Toyota Motor Corp (ADR) TM and Honda Motor Co Ltd (ADR) HMC.

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In other words, although CARZ is not a currency hedged ETF in the traditional sense, it is a de facto currency hedged ETF with its 35.5 percent weight to Japan. And with the yen being driven higher for much of this year on safe-haven demand, CARZ has suffered.

Now CARZ has to contend with slumping auto sales. Sales at General Motors Company GM, Ford Motor Company F and Toyota dipped last month, according to the Wall Street Journal. Those three of the five largest holdings in CARZ combine for almost 24 percent of the ETF's weight.

Looking Down The Track

Perhaps July will prove to be a minor bump in the road for CARZ. After all, the automotive industry has been a key driver for the U.S. economy in the years since the financial crisis, and some industry observers are still predicting record sales for 2016.

TrueCar Inc TRUE estimated the average transaction price (ATP) to have increased 1.3 percent to $32,518 for a new light vehicle in July. However, average incentive spending per unit also advanced by $159 to $3,225 in July. The research firm pointed out that the ratio of incentive spending to ATP rose to 9.9 percent from 9.6 percent a year ago, Benzinga reported Tuesday.

Along with a weak yen, CARZ would also benefit if the euro were to slide against the dollar as Germany and France, the eurozone's two largest economies, combine for over a quarter of the ETF's weight.

However, investor reaction to various monetary stimulus efforts this year by the Bank of Japan and European Central Bank has been less than enthusiastic, indicating investors are concerned that central banks are running out of tools with which to depress their currencies.

Full ratings data available on Benzinga Pro.