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Analyse: Source STOXX Europe 600 Optimised Automobiles & Parts ETF

Stürmt das deutsche Trio BMW, Daimler und VW die Bric-Staaten? Dieser ETF ist das Instrument für eine derartige, ambitionierte Wette.

Lee Davidson 22.06.2012
Rolle im Portfolio

The Source STOXX Europe 600 Optimised Automobiles & Parts ETF provides equity exposure to European-domiciled auto manufacturers and parts makers. If we look under the bonnet of the STOXX Europe 600 Optimised Automobiles & Parts index, the top three German automakers--Daimler, BMW, and Volkswagen--dominate the portfolio, representing ~60% of its total value. Despite being comprised of European auto and parts manufacturers, the index tends to be driven by global market dynamics since the largest constituents conduct business worldwide. As a general rule, the auto industry tends to be highly cyclical and capital intensive compared to other equity sectors. Due to the cyclicality and high fixed costs, auto producers' profits can fluctuate in the face of relatively small changes in demand.

Following the global slowdown in auto production in 2009, these three automakers have rebounded substantially, and posted significant increases in year-over-year revenues and profits in the first quarter 2012. Over the past year, revenues and profits were boosted by the escalation of BRIC country auto demand, which is poised to rise further. Moreover, these firms have some of the best brand equity in the industry and are diversified across most consumer types, especially luxury consumers. Luxury brand demand tends not to oscillate as greatly with cyclical swings as does demand for non-luxury brands, which exhibit much more volatile demand. As producers of luxury brand vehicles, these automakers have some built-in cushion to weather cyclical downturns better than most of their peer group.

Potential investors will adhere to a belief that these German automakers possess the capability to gain market share in the BRIC markets (especially China), will maintain favorable union relationships, and will invest in necessary R&D to develop leading technologies (e.g. lithium-ion batteries for hybrid and electric cars) in light of pending environmental legislation. Given its narrow concentration, this ETF is most suitable for use as a tactical tool. 

Fundamentale Analyse

Globalisation and increased emerging market demand has benefited the index’s constituents, especially the largest German auto manufacturers. For example, Daimler unit sales growth of Mercedes vehicles ranged between 40% and 140% in BRIC nations in 2010. These auto producers have capitalised on escalating demand in emerging markets by investing in local production and distribution centers within the borders of developing countries. By doing so, auto producers have reduced shipping costs, avoided trade barriers, and muted the effects of currency fluctuations. For Daimler, BMW, and Volkswagen, these local operations are a sustainable competitive advantage over some of their smaller, less-agile competitors.

In order to participate in the Chinese auto market, China requires automotive companies to establish local production centers and assemble a certain number of vehicles within their borders relative to their overall sales volume. Therefore, increasing local production in China actually enables German automakers to increase its overall exports from its German facilities, thus improving utilisation rates. Today, the Chinese auto market is becoming increasingly competitive and each firm is grappling for market share. Currently, Volkswagen commands the largest market share at 18% due to their stratified lineup that can target various consumer preferences and income levels. Recently, Volkswagen announced their intention to double their production capacity in China as they seek to claim a larger market share. At the moment, BMW is edging out Daimler for the top spot in the luxury brand space in China. Given their growing reliance on Chinese consumers, potential investors should keep in mind that slowing Chinese growth will adversely impact these automakers. 

Labour relations can seriously impact these firms’ operations. Volkswagen and BMW have maintained very favorable union relations in the past few years, and should they continue to do so, associated operational risks should be moderate. Daimler recently divested itself entirely from the very unprofitable Chrysler corporation, and in doing so, rid itself of billions of dollars of United Auto Workers pension and health-care liabilities. As a result, Daimler should be able to renew its focus on improving relations with German labour unions.

In terms of auto demand, North American auto sales have been surprisingly strong at the start of 2012--US auto sales rose 30% y/y in May. Sales, in North America especially, have been lifted by strengthening replacement demand and lower gas prices. In 2012, economists from R.L. Polk are predicting a 7% increase in global auto sales. In response to renewed demand, German carmakers expanded production 12% y/y in January after a significant drop-off in the fourth quarter of 2012.

Looking ahead, new environmental legislation being instituted worldwide will put pressure on the auto industry to develop more efficient combustion and zero-emission vehicles. Moreover, global overcapacity may weigh on the industry and create price pressure. Also, rising raw material prices pose a risk to industry profitability, especially for tire companies. The price of natural rubber (the main raw ingredient for tire companies) has risen about fivefold over the last three years. 

Indexkonstruktion

The STOXX Europe 600 Optimised Automobiles & Parts Index is a total return index and a subset of the broader STOXX Europe 600 index, which covers about 90% of the aggregate market capitalisation of the eligible countries. The components are selected from publicly-traded companies headquartered in the 16 eligible countries within Europe. The index is free-float adjusted and market capitalisation weighted. Because closely held firms will have a smaller piece of their aggregate market capitalisation floated on public exchanges, the free-float adjustment serves to ensure the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. The weightings of individual constituents are capped at 20% of the index's total value. Moreover, the index is optimised by measuring each stock's average daily turnover over the last three months to ensure liquidity of the underlying. As of this writing, the index has 15 components. From a geographic perspective, it is biased towards Germany (71% of the index’s value), followed by France (20%) and Finland (4%). Moreover, the index is very top-heavy with the top three constituents accounting for more almost 60% of its total value. Daimler, Volkswagen, and BMW each represent 20% of the index’s value, followed Michelin (7%) and Renault (7%).

Fondskonstruktion

The Source STOXX Europe 600 Optimised Automobiles & Parts ETF uses synthetic replication to track the performance of the STOXX Europe Optimised Automobiles & Parts Total Return Index. Unlike most synthetic ETF providers who use only one swap counterparty per fund, Source engages multiple swap counterparties, which diversifies counterparty exposure amongst multiple entities. The swap counterparties include Bank of America-Merrill Lynch, Goldman Sachs, Morgan Stanley, JP Morgan, Credit Suisse and Nomura. Source resets individual swaps to zero when exposure to the swap counterparty reaches 4.5% of its notional amount the fund’s net asset value. The swaps are also reset whenever there is a creation or redemption in the fund. Each counterparty delivers a basket composed of European, U.S. and Japanese equities to be held at the Northern Trust and marked to market daily. In exchange for delivering the index's performance, the swap provider receives the performance of this collateral basket, plus a fee. Currently, Source does not engage in securities lending in its ETFs, but will notify investors in advance if that policy changes. The ETF does not distribute dividends. The fund is domiciled in Ireland and its base currency is the Euro. 

Gebühren

The fund levies a total expense ratio (TER) of 0.30%. This lies in the middle of the range for equity ETFs tracking the automobiles and parts industry in Europe.

Alternativen

As of writing, there are four alternative ETFs offering virtually identical exposure to the automobiles and parts industry in Europe. The largest alternative in terms of total assets under management is the ComStage ETF STOXX Europe 600 Automobiles & Parts. ComStage uses synthetic replication to track its reference index and levies a TER of 0.25%.

Investors preferring physical replication can make use of the iShares STOXX Europe 600 Automobiles & Parts ETF. This ETF levies a TER of 0.52%.

With €160m in assets under management (AUM) as of this writing, Source’s ETF is by far the largest tracking the auto sector in terms of total AUM. By way of comparison, the ComStage ETF has AUM of €18m. This is also reflected in the superior liquidity of the Source ETF in terms of average daily on exchange trading volume over the past three months.

Über den Autor

Lee Davidson  is an ETF analyst with Morningstar Europe.