ETFs Driven by Stronger Automobile Demand

NEW YORK (ETF Expert) -- Lately, I've been fielding a great many questions related to automobile companies.

Had I seen the five-year highs on car purchases? Am I aware that autos were the strongest segment in 2012 retail? What's the best ETF for capturing the inevitable growth?

In truth, I'm not necessarily convinced the U.S. auto sector will continue along the same robust path. Government backing and a commitment to fuel efficiency may have brought Ford (F) and General Motors (GM) back into play. Yet, it is the inexpensive financing that deserves the lion's share of credit in an auto recovery.

Keep in mind, as early as the second half of 2013, the Federal Reserve may outline its exit plans from unconventional easing. Even if the Fed does not begin to raise rates -- even if the cessation of bond-buying is a year or more away, markets may begin to factor in a slowdown in consumer activity.

Perhaps fortunately, the First Trust's Global Auto Index Fund (CARZ) is truly global. The fund tracks an index of 35 manufacturers, with 37% exposure to Japanese corporations, 17% to U.S. companies and to 16% German manufacturers.

At present, this exchange-traded vehicle is severely overbought and ripe for a pullback. It is 20% above its 200-day moving average. (Double-digit percentages are bad enough.) Meanwhile, the Relative Strength Index readings on the current CARZ price is also flashing high beam warnings.

The 0.70% expense ratio on CARZ also makes me cringe. I rarely consider ETF investments that grab more than 0.5%, and there are times when I am reluctant about anything above the iShares/Vanguard/State Street norms. On the other hand, CARZ sports a price-to-book of 1.16 and a price-to-sales of 0.35. There's nothing particularly expensive about that.

At the very least, I would wait for a pullback to the 50-day moving average before committing new money. Believe me, a patient investor will wait for an 8% to 10% selloff.

Additionally, one may wish to play autos from an entirely different angle. One might consider ETFS Physical Palladium (PALL).

Autos require palladium for catalytic converters. Many analysts maintain palladium demand is so strongly related to the cyclical nature of auto sales that one cannot even separate the two.

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