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Must-know: Top auto industry ETFs for investors
The First Trust NASDAQ Global Auto ETF (CARZ) is the most traded auto-focused ETF. The three-year return for the ETF is 48.32%. YTD, CARZ provided a return of 2.23%.
What makes the auto industry highly concentrated?
The automobile industry is one of the most highly concentrated industries in the world. The market continues to be dominated by a few major companies.
Suppliers’ power is increasing in the automobile industry
Auto suppliers’ contribution increased from 56% in 1985 to about 82% now. Automakers are becoming more like assemblers and less like manufacturers.
Ford, Daimler, and BMW employ high financial leverage
Ford (F) uses a high amount of financial leverage. Its debt-to-capital ratio is 81.1%. This is significantly above the industry average of 53.1%.
Intense competition leads to low profit margins for automakers
The auto industry has lower margins primarily because of intense competition. It makes it difficult for companies to pass on increases in raw material prices to the customer.
Why growth shifted in the global automotive industry
The automotive industry is geographically concentrated. The top 15 countries produce 88% of the world’s vehicles. Almost all of the G20 nations have a manufacturing unit.
Gasoline prices affect automobile purchases
As of December, gasoline prices fell by 34.4%—compared to last year. Used car purchases increased by 19.4%. Expenditure on new motor vehicles also increased.
Why GDP and automotive industry growth are related
There’s a direct correlation between the size of a country’s GDP and its automotive industry. The auto industry has been expanding at a fast pace over the past several years.
Declining interest rates lead to more auto loans
As of 2Q14, the total outstanding auto loan amount in the US hit an all-time high of $905 billion. It grew at a CAGR of 6.2%—from $711 billion in 2010.
Vehicle leasing is driven by life cycles and innovation
There are higher maintenance and repair costs as a car gets older. This supports the option of leasing a vehicle.
Automakers use incentives to entice customers
Typically, automakers provide incentives in a slow market. They offer incentives for low-selling models. The total number of vehicles sold in the US in 2014 was 16.5 million.
High operating leverage impacts the auto industry
The auto industry has high operating leverage. Operating leverage represents fixed costs as a percentage of total costs. High operating leverage magnifies gains and losses.
Government regulations push auto research and development
Auto firms invest huge amounts of money in research and development. They have to develop more fuel-efficient models to meet government regulations.
Advertising is key for automotive companies
The automotive industry is one of the biggest spenders when it comes to advertising. General Motors (GM) paid out $928 million during the first half of 2014.
Why the automotive industry generates employment
The automotive sector plays a crucial role in job creation. Car manufacturing activity has an employment multiplier value of five.
Raw materials – the biggest cost driver in the auto industry
Raw materials contribute about 47% to the cost of a vehicle. On average, an automobile is 47% steel, 8% iron, 8% plastic, 7% aluminum, and 3% glass.
Daimler and BMW dominate the luxury car segment
German automakers lead the luxury space in the US. Daimler AG had an 18.4% share. It was followed by BMW. It had a 16.8% share.
Certain automakers dominate the different car segments
The domestic giants have a significant US presence in trucks. These automakers show their muscle in the midsize SUV segment.
The US automotive industry’s big guns are declining
The competition between light trucks and cars characterizes the US automotive market. Over the past four years, consumers steadily moved towards SUVs and pickups.
Global automakers dominate in their own country
In the 1980s, the US, Europe, and Japan together manufactured 90% of the world’s vehicles. The global automakers spawned from these regions.