Investing in Global Demand for Cars

NEW YORK ( TheStreet) -- America's love affair with the automobile has become the world's love affair with the automobile, and while there are fewer car companies in the U.S. than before, the industry overseas is growing as cars are becoming more accessible in more countries. As an example, IHS Automotive estimates that India will become the third largest automotive market by 2016, surpassing Japan and Germany.

First Trust Global Auto Index Fund ( CARZ) is an option for investors who want to capitalize on this trend. The exchange-traded fund started trading a little over two years ago when General Motors ( GM) was performing poorly, and so CARZ declined more than 20% in its first three months, lagging the SPDR S&P 500 ( SPY) and the Industrial Sector SPDR ( XLI).

In the trailing 12 months, however CARZ, helped by Tesla's ( TSLA) nearly five-fold gain, has rallied 64%, well ahead of both SPY and XLI.

CARZ tries to take advantage of growing demand for cars worldwide, though it does not do so for every country. Japan is the largest country weighting at 33%, followed by Germany at 23% and the U.S. at 20%. South Korea has an 8% weighting, mostly with Hyundai ( HYMLF) and Kia ( KIMTF). The fund, however, comes up short by allocating only a combined 5.3% to China and Hong Kong. The most recent reports for China show sales growth of 9.3%.

A glaring omission is India. An estimate from the Society of Indian Automobile Manufacturers calls for sales to increase to 4 million units by 2015. And although that is a decline from previous estimates of 5 million, India is becoming increasingly important to the industry. Many of the larger global companies sell cars in India, but the numbers are not large enough to move the needle on their stocks.

There are a couple of relatively large auto manufacturers in India including New York Stock Exchange-listed Tata Motors ( TTM), which has a market cap of $15 billion. An inquiry to First Trust was not able to specifically address when or if any Indian companies would be included.

The largest holdings in CARZ are the usual suspects, including Daimler ( DAI), Ford ( F), Toyota ( TM); each of the three has close to an 8% weighting in the fund.

CARZ employs a modified market-cap weighting. If the weighting was not modified, then Toyota could have a 30% weighting in the fund by virtue of its $194 billion market cap.

CARZ has a 0.70% expense ratio and a 0.85% trailing dividend yield.

Auto stocks tend to trade like cyclicals. During large market declines, they tend to go down much more than the broad market, and during market rallies, they tend to outperform.

For now, it seems that the broad market wants to continue higher until the Federal Reserve provides more specific plans of slowing down its bond purchases. So CARZ has a good chance to trade higher, as well.

One part of the series on auto stocks and ETFs that we are doing today on TheStreet is for the authors to mention whether they have a favorite vehicle or even a dream vehicle.

As my profile notes, I am the chief of our local all-volunteer, donations-based fire department, and so my dream vehicle would be a Type 3 Wildland Engine made by Navistar ( NAV). It would be a first-response engine to any wildfires in our area. The one pictured is a National Park Service vehicle, but that same model is also used by the U.S. Forest Service and other agencies.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.