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Collection of tutorials and a guide for using TGJU & Financial Markets
The term “automotive sector” is used both in the automobile industry and the financial industry to refer to the companies that form the market sector and the financial products derived from their performance, such as stocks and exchange-traded funds. In the United States, the automotive sector’s performance is greatly influenced by the automobile industry’s big three manufacturers: General Motors, Ford and Chrysler. Consequently, the auto industry’s performance also affects other major sectors such as transportation, oil, and food and beverage. In addition to manufacturers, this sector includes the manufacturers and resellers of auto parts, third-party servicing companies, manufacturers of trailers and tire stores. In the United States, each subsector of the automotive sector is recognized by the North American Industry Classification System.
Consequently, the automotive sector is not limited to the manufacture of cars and commercial vehicles. It also includes specialized industrial vehicles and other capital equipment as well as automobile design, research and development, and auto finance. The sector also provides employment to professionals from several fields including administration, human resources, engineers, sales, marketing, health care, finance, accounting, retail, wholesale and management.
The Organization Internationale des Constructeurs d’Automobiles ranks the United States as the second-largest producer of automobiles, second only to China in the number of motor vehicles produced per year. In 2014, the country’s annual production of 11.66 million passenger and commercial vehicles is greater than the combined production of Germany and South Korea, the next two countries on the list, according to OICA’s annual report.
The Center for Automotive Research estimates that over 16 million units – including passenger, commercial and other vehicles – were produced that same year. In 2015, the U.S. automobile sector is estimated to be worth approximately $620 billion, contributing between 3% and 3.5% of the nation’s GDP, according to a research paper by CAR.
The U.S. automotive sector employs over 1.7 million people and pays over $500 billion in annual compensation, and it is responsible for creating jobs in multiple sectors that support the automotive industry. OEM remains one of the largest subsectors created by the automobile industry, employing over 2.4 million people in manufacturing spare parts and accessories not directly manufactured by automakers. In 2014, it also contributed $206 billion to state and federal coffers in tax revenue.
Investors interested in electric cars have a variety of options. Automakers such as Tesla Motors exclusively manufacture electric vehicles and may be directly invested in by purchasing stock. Companies within the automotive sector that manufacture vehicle parts or supply raw materials used in producing electric cars are another means of gaining portfolio exposure to electric cars. Another slightly less risky option is to invest in exchange-traded funds (ETFs) with holdings in securities related to electric vehicle production or electric vehicle parts.
Some major automakers, such as Toyota, are investing heavily in electric vehicles and allow investors to choose both traditional and electric vehicles for their investments. Chevrolet and Nissan have also made notable electric car models available in the U.S. market. Investors should carefully consider available investment opportunities and evaluate the potential risk return tradeoff offered by electric vehicles and the automotive industry.
Many manufacturers develop auto parts for traditional and electric vehicles. Polypore International (PPO) produces lead acid batteries used in both conventional and electric vehicles. This stock offers investors the opportunity to invest generally in the production of vehicle batteries. As electric vehicle and conventional vehicle usage grows, more batteries will be needed and this company will likely benefit from increased global car demand.
Another battery company, Plug Power (PLUG), manufactures hydrogen fuel cell batteries used in electric vehicles and many other types of electronic equipment. These batteries may replace lead acid batteries in fork lifts. Plug Power batteries are also used outside the automotive industry, giving the company a large market.
Sociedad Quimica y Minera (SQM) is a major supplier of lithium, an element used in many batteries powering electric vehicles and other clean technologies. Investment in companies such as Polypore International, Plug Power and SQM offers portfolio exposure to electric vehicles while also maintaining diverse holdings outside the automotive industry.
Exchange-traded funds that track electric vehicles are another possible opportunity for investors. These funds allow investors to purchase shares in funds that track electric vehicle industry development. Investments are spread across multiple companies, reducing investment risk and offering returns similar to the average returns of the entire sector. ETFs track gains and losses of stock indexes and are traded directly on the stock market in a means similar to stock trading. Just as in traditional stock trading, stop-loss limits may be placed and dividends are paid to brokerage accounts.
Significant ETFs that include electric vehicle stock and supplier stock include QCLN and LIT. The First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) has Tesla among its holdings and includes other companies with green technology offerings. Global X Lithium (LIT) tracks lithium suppliers and battery companies. This fund’s most significant holdings include FMC Corporation, Avalon Rare Metals Incorporated and Rockwood.
iShares, Vanguard ETFs and spiders each represent different exchange-traded fund (ETF) families. In other words, an individual company offers a range of ETF types under one product line. Because these ETF families are constructed and operated by different companies, you will find differences in terms of how they are made up and what indexes or sectors they cover.
BlackRock is the company behind the iShares family of ETFs. The company offers a large selection of more than 350 funds, which cover a wide range of both U.S. and international sectors and indexes, as well as asset classes, including bonds, real estate and commodities.
The Vanguard ETF family, formerly known as the Vanguard Index Participation Receipts (VIPERs), is similar to iShares in that it offers a wide range of ETF types covering numerous indexes and sectors in more than 50 different funds.
State Street Global Advisors’ Spiders (SPDRs) are index funds that were initially based on the S&P 500 index, but branched out to include other investment options as their popularity grew. Some of the best-known spiders are the 10 Select Sector SPDRs that cover individual sectors of the S&P 500. (For more, see What are SPDR ETFs?)
The differences between spiders, Vanguard ETFs and iShares are primarily based on the companies behind these ETFs and which indexes and/or sectors they cover. But if you are looking for exposure to the S&P 500, for example, which is offered by more than one ETF company, look at the more specific attributes of the fund. The biggest thing to focus on in this case will be the fund’s expense ratio (a lower expense ratio is generally more desirable), along with how well the ETF tracks the underlying index.
For more insight, see the Exchange-Traded Funds Tutorial.
The Nasdaq 100 Index is composed of 100 of the largest international and domestic companies, excluding financial companies, that are listed on the Nasdaq stock exchange, based on market capitalization. Therefore, QQQ is heavily weighted toward large-cap technology companies and is often viewed as a snapshot of how the technology sector is trading.
As an ETF, as opposed to an index, QQQ is a marketable security that trades on an exchange, offering traders a way to invest in the largest 100 non-financial companies listed on the Nasdaq.
The QQQ tracks the information technology, consumer discretionary, health care, consumer staples, industrials and telecommunication services sectors. QQQ is rebalanced quarterly and reconstituted annually.
As of Feb. 14, 2018, the sector breakdown of QQQ was:
The top 10 holdings of QQQ, as of Feb. 14, 2018, were:
Apple, by far the most important company for QQQ investors, has a market cap of around $900 billion — the largest in history. Apple has perfected the art of getting consumers into its ecosystem and not letting go, by upselling and releasing new versions of old products in order to keep revenue growing.
Microsoft, Google and Amazon are all highly innovative with strong operational cash flow. With the exception of Amazon, these top holdings all deliver consistently on the bottom line, which helps investors feel secure. Amazon, for its part, boasts rampant top-line growth.
Those looking for an ETF that comes with a very low expense ratio (0.2%, as of February 2018) and tracks quality names, may want to consider QQQ.
There are futures contracts available and traded on exchanges for virtually every class of investment asset, ranging from agricultural commodities to stock index futures.
The earliest known futures exchange was established in Japan in 1710 for trading rice futures, although informal futures trading in metals took place in England as far back as 1571. The modern futures exchanges can be traced back to the beginning of agricultural commodity futures trading in the United States in the 1840s. The Chicago Board of Trade (CBOT) was formed in 1848 and remains one of the largest futures exchanges in the world.
Initially, the primary futures contracts traded were agricultural commodities and metal, but trading in financial products has surpassed basic commodity trading and accounts for the largest dollar volume of futures trading.
The main futures exchanges in the United States include the CBOT, the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX) and OneChicago, which trades futures on single stocks and exchange-traded funds (ETFs). The main futures exchanges in London are the London Metal Exchange (LME) and ICE Futures Europe.
Futures contracts are grouped by type. With the advent of trading in eurodollar futures in 1981, the CME quickly expanded trading in currency futures to include over 20 currencies. This initial trading on the CME is what eventually led to widespread foreign exchange trading worldwide.
Energy futures contracts, including crude oil and natural gas futures, are traded primarily on the (NYMEX).
Food and fiber futures products are also primarily traded on the NYMEX. This group of futures contracts includes coffee, cocoa, orange juice, sugar and cotton. Orange juice futures are heavily speculated upon during the winter months when unexpected freezes can damage significant portions of the expected crop. Cotton futures trading was a huge market in the U.S. beginning in the 19th century, and many of the most legendary speculators, such as Jesse Livermore and John “Bet a Million” Gates, made and lost fortunes trading cotton futures.
Nearly all of the main agricultural commodities are still traded on the CBOT. Although corn was the initial agricultural product traded on the CBOT, soybeans and wheat have supplanted it as the most widely traded crops.
Interest rate futures were first introduced by the CBOT in the 1970s and quickly became among the most heavily traded futures contracts. U.S. Treasury notes and bonds are now among the top five futures contracts traded in terms of both volume and dollar value.
Livestock, namely cattle and hog futures, are traded on the CME. Live cattle futures are one of the top 20 most heavily traded futures contracts.
Metals contracts, which include gold, silver and copper, are traded on the NYMEX. Gold futures remain one of the most popular futures contracts with speculators.
As of 2015, among the most recent additions to futures contract trading are stock index futures, including the Dow Jones Industrial Average (DJIA), the S&P 500 Index and the Nasdaq 100 Index, along with a handful of real estate futures contracts. All of these are traded on the CME. The S&P 500 Index futures are the most heavily traded of this group.
Finally, weather futures contracts are traded in order to provide risk protection against conditions resulting from adverse weather conditions.
The bid-ask spread is the difference between the highest offered purchase price and the lowest offered sales price for a security. The spread is often presented as a percentage, calculated by dividing the difference between the bid and ask by either the midpoint or the ask. In the case of equities, these prices represent the demand and supply for shares in the stock market. The primary determinant of bid-ask spread size is trading volume. Thinly traded stocks tend to have higher spreads. Market volatility is another important determinant of spread size. Spreads usually grow in times of high volatility.
Trading volume refers to the number of shares of a stock that are traded in a given time period and measures the liquidity of a stock. High-volume securities such as popular exchange-traded funds (ETFs) or very large firms including Microsoft or General Electric are highly liquid, and the spreads are usually only a few cents. Many investors are looking to buy or sell shares of these companies at any given time, so it is easier to locate a counterparty for the best bid or ask price.
Stocks with low volumes usually have wider spreads. Small companies frequently exhibit lower trading volume because fewer investors are interested in relatively unknown firms. Large bid-ask spreads on illiquid shares are also used by market makers to compensate themselves for assuming the risk of holding low-volume securities. Market makers have a duty to engage in trading to ensure efficiently functioning markets for securities. A wide spread represents a higher premium for market makers.
Volatility measures the severity of price changes for a security. When volatility is high, price changes are drastic. Bid-ask spreads usually widen in highly volatile environments, as investors and market makers attempt to take advantage of agitated market conditions.
The price-to-earnings (P/E) ratio is one of the most frequently used and trusted stock valuation metrics. It is calculated by dividing a company’s share price by its earnings per share. This provides a measure of the price being paid for the earnings. A high P/E ratio signifies greater investor confidence in a company’s future prospects, but it can also be a sign shares are overvalued.
A company’s P/E alone doesn’t give a full picture of how expensive a stock is. It is important to look at it relative to the company’s industry or a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA).
Many financial websites have P/Es for individual companies, but not for indexes like the Dow or S&P 500. And while some websites do contain P/E ratios for indexes, the accurate P/E ratio of an index, which is the index’s total price divided by its total earnings, can sometimes be difficult to obtain. Some calculations or listings of an index’s P/E ratio do not include companies in the index that have negative earnings, or they fail to factor in the weighting of the index. Typically, to get an accurate P/E reading, analysts and investors need to go to the index publisher’s website.
The most accurate P/E ratio for an index will be found if an investor calculates the P/E ratios of all equities that make up the index. Since that can be a time-consuming process, some investors prefer to accept the approximation provided by the P/E ratio of an exchange-traded fund (ETF) that closely tracks the index in question. While this measure is not as exact as the index’s own measure, the information is a lot easier to find. For example, those who want to know the P/E ratio of the S&P 500 can look at the SPDR S&P 500 ETF (SPY), and for the Dow, investors can consult the SPDR Dow Jones Industrial Average ETF (DIA).
There is likely to be some discrepancy between an ETF’s P/E ratio and that of the index itself. This discrepancy is due to the fees charged on an ETF, along with the fact that ETFs are traded on the stock market. Fluctuations in the price of the ETF are affected by both the underlying index and the regular price movement of the ETF, which acts like a stock. Further variation can result from the fact that the ETF’s holdings may not precisely match the index’s equity makeup. That said, the return on an ETF is often very close to that of the index, and an ETF’s P/E ratio often provides a good approximation for the P/E of the index it tracks.
For further reading, see Understanding the P/E Ratio and Introduction to Exchange-Traded Funds.
To answer this question, we should first define exactly what an index fund is. An index fund is a mutual fund, or a basket of stocks sold by a mutual fund company, that attempts to mimic or trace the movements of a given index.
You can buy index funds for numerous different indices, including the S&P 500, the Dow Jones Industrial Average and the Russell 2000. With an index fund, you are buying ownership into a portion of a portfolio composed of stocks that are weighted in such proportions as to track a desired index.
A trader engages in shorting when he or she borrows a security, usually from a broker, and then sells it to another party. The short seller hopes the security’s price will go down so that he or she can pay a lower price when buying back the security to return it to the lending party. If successful, the short seller will profit from the difference between the price at which the security was sold and the lower price at which it was bought back. Because you purchase and redeem mutual fund units from the mutual fund company and (generally) not on the open market, you can’t short an index fund.
However, as technology has evolved in other areas of the economy, it has also done so in the financial sector. The need for an index-tracking, stock-like security was recognized and the security known as an ETF, or exchange traded fund, was born. An ETF’s value is tied to a group of securities that compose an index. Investors are able to short sell an ETF, buy it on margin and trade it. In other words, ETFs are traded and exploited like any other stock on an exchange.
ETFs attempt to track a given index, so they fluctuate in price throughout the day as the index fluctuates in value. However, as an ETF’s price depends on the forces of supply and demand (which change with the movement of the underlying index), an ETF might not track the market in perfect unison, but most come very close.
An exchange-traded fund (ETF) portfolio is simply a portfolio, or group of investments, that consists entirely of ETFs. ETFs are very much like mutual funds in that they are a basket of stocks or other assets that are managed in either a passive or active investment style. Passively managed ETFs aim to mimic the performance of a particular market index, while actively managed ETFs aim to outperform a particular market index. ETFs are different than mutual funds in that they are exchange-traded throughout the day, providing intra-day liquidity for investors. Because ETFs trade on exchanges, investors can short them and buy or sell options on them.
This flexibility may make a portfolio of ETFs more attractive to investors than portfolios of mutual funds. Due to the diversity of ETFs available to investors, almost any type of ETF portfolio can be constructed. There are ETFs available that cover almost every type of asset imaginable. Equity ETFs available include large cap, mid cap and small cap, as well as growth, value and blend styles among these various market capitalizations. Also, there are ETFs that track every major equity index in the U.S. and most developed countries.
Beyond this, many different types of fixed-income ETFs track corporate bond, treasury bond, high-yield, international and emerging-debt indexes. Investors can also invest in real estate, commodity, alternative investment and currency ETFs. Lastly, many firms have leveraged ETFs that offer two or three times the return of an underlying index, as well as inverse ETFs that provide the opposite returns of an underlying index or asset.
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