Investing in the Automotive Industry
Learn more about investing ETFs and stocks in the auto industry, which comprises 3.5% of America’s economy.
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Things you’ll learn in this guide:
- How cars have shaped modern life
- Which car companies lead the auto industry and world industry
- Why the car industry is such a hotbed of innovation
Learn more about investing in the automotive industry.
Car manufacturers are innovating at a fast and furious pace, for everything from increased mileage to electric vehicles. Learn how car stocks can fit into a diversified portfolio.
Under the hood: what is the auto industry?
It’s hard to think of another technology or invention that has shaped modern life as much as the automobile.
Cities have grown larger because of cars, enabling residents to move 20 miles or more from urban centers—meaning that the suburbs couldn’t exist without them. Numerous industries also depend on car manufacturing and sales to continue operating–think oil for gasoline, rubber for tires, and plastics for the innumerable components that go into cars.
It’s all thanks to, and part of, the automotive industry.
There are about 1.5 billion cars on the planet, and that number is expected to grow to 2 billion by 2040. In 2017, some 88 million cars sold worldwide, and nearly a quarter of those were sold in the U.S. alone.
In the U.S., automobile manufacturing and sales contribute up to 3.5% of the U.S. economy, according to research. As an industry, they are the biggest manufacturing and retail segments combined, employing close to 2 million people who either work directly for the big manufacturers, or for companies selling parts and manufacturing components as suppliers, not to mention the sale of the vehicles themselves.
Meanwhile, car companies are some of the biggest innovators around. Whether it’s coming up with the idea for the first moving assembly line more than a century ago, to today’s “just in time” method of manufacturing, which conserves time and resources by producing what’s needed only when it’s necessary.
And let’s not forget that the trucking industry, which moves the products consumers depend on from one corner of the country to another, is also an outgrowth of the automobile. In 2017, revenues for this subset of the industry alone were three-quarters of a trillion dollars.
Trucking, and much more—from automakers to gas station operators–are all components of the auto industry.
What are the key auto stocks and companies?
The kings of the industry in the U.S. are the so-called Big Three automakers Chrysler, Ford, and General Motors. These companies were at one point also the largest manufacturers in the world.
Today, they are still critical to the economy, but in recent years have been joined by foreign auto manufacturers including Honda and Toyota, which employ some 100,000 workers in the U.S., in addition to their workers overseas.
European automakers also produce millions of vehicles every year. Volkswagen, one of the world’s largest car companies, is a prime example, as is Daimler. Fiat Chrysler Automobiles, the parent of some big U.S.-based brands such as Dodge, Jeep, and Chrysler, is based in Italy.
Also among the world’s largest automakers are Hyundai and Nissan, and companies that don’t actively sell vehicles in the U.S., such as Renault, Suzuki, and Changan.
What is happening in the auto industry?
Bigger is better (and more profitable)
The auto industry has had its ups and downs over the years. In fact, the sector took a big hit during the Great Recession, when car sales nosedived and several automakers, including General Motors and Chrysler, filed for bankruptcy.
In the years following the financial crisis, however, car companies have slowly rebuilt themselves into profitable businesses again, even as consumers opted for smaller, more efficient cars.
These preferences have begun to change over the past few years. Although gas prices have started to rise since 2017, the U.S. economy is humming—as a result, consumers are opting for bigger, more expensive cars. Ford, for example, recently decided to gut its lineup and focus on building trucks and SUVs. Such vehicles are more profitable than sedans and coupes.
Consumers are clearly willing to pay more, too. The average monthly loan payment for a new car recently hit a record of $523.
Cleaning up their act
While cars are a huge part of the economy, they’ve also taken a physical toll on the planet. Cars contribute to the warming of the earth’s atmosphere, dumping billions of tons of carbon into the atmosphere each year.
The Environmental Protection Agency (EPA) estimates that about one-third of all greenhouse gases are caused by cars and other forms of transportation that use petroleum fuel. And traffic-related deaths—about 1.3 million people annually die from car accidents—are also a significant concern.
Car makers are aware of the problems, and they are innovating at a fast and furious pace, with manufacturers focusing on making automobiles that are more energy efficient, safer, and–soon–driverless.
Additionally, fuel efficiency has increased over the years, and cars now average about 25 miles to the gallon, an increase of nearly 30% from 2004, according to the U.S. Environmental Protection Agency.
And all of the major car companies now have electric models or hybrids whose motors switch between gas and electric. As much as 5% of all sales could be for all-electric vehicles in the next ten years, according to recent research.
An automatic transition?
Someday soon, driverless cars may become the norm. That could mean a new future, with fleets of shared cars circling neighborhoods, ready to take you grocery shopping, or safely home after a big night out.
“My guess is that in probably 10 years it will be very unusual for cars to be built that are not fully autonomous,” Elon Musk, the founder and chief executive of electric car manufacturer Tesla said recently at a summit of world leaders.
Investing in auto companies
Think the auto industry is worth investing in? You can add automakers and related companies to your portfolio, and there are a few ways to do it.
Investors in the U.S. can buy shares of stock in companies working in and around the industry on a publicly-traded exchange, or buy shares of a fund—like an exchange-traded fund, or ETF—that offers exposure to those companies.
Investing in the automotive industry: Single stocks
A single stock is just that, a share of ownership of a company. For example, investors can purchase shares of stock in companies including Ford, General Motors, Tesla, Chevron, and ExxonMobil.*
Investing in auto ETFs (exchange-traded funds):
Exchange-traded funds (ETFs) are a basket of investments bundled into a fund that’s traded on an exchange like the Nasdaq or NYSE.
When you invest in an ETF, you are effectively buying small fractions of the companies within that ETF. The fraction depends on the weights stocks held in that fund. That fund owns the stocks within it and generally tracks an index–or group of investments that represent part of an industry or investment theme.
Automotive ETFs vs stocks
ETFs have become popular in recent years as they give investors the opportunity to invest in the performance of a group of stocks without having to buy every single stock in the fund or handpicking single stocks.
Not only can this save time and research, ETFs can offer diversification, which many consider being an essential investing strategy.
Investing in the automotive industry on Stash
*Listed investments currently available on Stash but not necessarily representative of all investments.
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