Does Oil Price Rise Spell Trouble for Transportation ETFs? - ETF News And Commentary
Transportation stocks have enjoyed a stretch of gains over the past few months benefitting by cheaper oil and an improving U.S. economy. Oil price carnage over the past 10 months gave the red signal to oil bulls. The commodity has lost over 50% during this period of freefall. However, this went in favor of the transportation industry.
This is because energy is the major cost head for transportation companies. Airlines, shipment and rail companies need to use oil to produce energy and run their businesses. For example, the profit outlook of airline stocks depends largely on fuel prices, the major variable component in the industry (read: 2 Sector ETFs to Benefit from the Crude Oil Slump).
As a result, a drop in oil prices can boost the margins of the transportation stocks and the related ETFs and the vice versa. Though stepped-up economic activity thanks to a steadily improving U.S. economy still favors the sector, the latest revival in oil prices has flared up tension in the space.
The waning trend in oil bucked the course from late March when Saudi Arabia and its Gulf Arab allies enforced a military air strike in Yemen. Notably, Middle East accounts for about one-third of the world’s total oil production. Conflicts in Saudi – the top oil exporter in the world – could threaten oil supplies globally (read: Oil ETFs Jump on Yemen Concerns & Weaker Greenback).
While oil has exhibited a volatile trend since then, fresh news of Saudi attacks on Yemen, slowdown in U.S. shale output and spending cuts by big oil companies recently took Brent crude to a four-and-half month high and led WTI crude to log gains for the sixth week in a row. Added to this, a falling greenback amid the possibility of a delayed Fed rate hike lent a hand to the overall commodity investing including oil (read: Oil ETFs Jump on Yemen Concerns & Weaker Greenback).
As a result, popular oil ETFs including United States Oil Fund (USO), United States Brent Oil Fund (BNO) and PowerShares DB Oil Fund (DBO) added about 14.2%, 15.9% and 11.5% in the last one month (as of April 24, 2015), respectively.
Effects on Transportation ETFs
Two transportation ETFs including iShares Dow Jones Transportation Average Fund (IYT) and SPDR S&P Transportation ETF (XTN) – were down 0.8% and 3.1% in the last one month. So far this year (as of April 24, 2015), the funds are off 3.1% and 2.7% respectively. While oil is definitely an issue, West Port congestion can also be blamed for the acute year-to-date plunge in transportation ETFs (read: West Port Congestion to Hurt These ETFs).
Going Forward
There is high chance that oil will rebound, may be not to a large extent, in the coming days after the massive sell-off it had been through last year. So, this factor will surely go against the transportation companies. But one should not ignore the other tailwinds for the sector.
After all, U.S. economic growth remains healthy. This will translate into higher activities boosting transportation companies. Moreover, higher oil prices will benefit shipping companies which are used to transport bulk of oil and gas across the country and around the world.
Zacks Earnings Trend also bears the same bullish tone with the sector expected to report a whopping earnings expansion of 19.9% in Q2 of 2015 on 2.7% revenues. The full-year outlook also remains bullish with 29.8% earnings growth accompanied by a 3.1% increase in revenues.
Given the mixed scenario, we would like to conclude that transportation ETFs will likely be hit but not as hard as many have feared. The space has had enough of low oil support and now it has to operate in a fairly balanced situation. Below, we highlight three transportation ETFs that could be in watch in the days ahead.
Guggenheim Shipping ETF (SEA)
The $73 million fund tracks the Dow Jones Global Shipping Index and holds 26 securities in its basket. The index reflects high dividend-paying companies in the global shipping industry. As far as the sector breakdown goes, the fund is concentrated on the industrial sector with about 65% exposure while the rest is attributed to the energy sector.
In terms of geographic distribution, the U.S. takes the top spot with more than 32% of focus, followed by the Denmark (21.6%), Japan (12.4%) and Greece (8.0%). The product charges 66 bps in annual fees for this diversified exposure. The fund is up about 11% so far this year and added 3.9% in the last one month (as of April 24, 2015).
iShares Dow Jones Transportation Average Fund (IYT)
The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to the small basket of 20 U.S. securities. From a sector perspective, railroad takes the top spot with less than half share in the basket, while air freight & logistics and airlines round off to the top three with double-digit exposure each. The fund has accumulated nearly $1.29 billion in AUM. It charges 43 bps in annual fees.
SPDR S&P Transportation ETF (XTN)
This fund uses the equal weight methodology to each security by tracking the S&P Transportation Select Industry Index. Holding 49 stocks in its basket with AUM of $592 million, each security accounts for less than 2.74% of total assets.
About one-third of the portfolio is dominated by trucking while airlines take another one-fourth share. Airfreight & logistics, and railroads also make up for a double-digit allocation. The fund charges 35 bps in fees per year from investors.
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ISHARS-TRAN AVG (IYT): ETF Research Reports
SPDR-SP TRANSPT (XTN): ETF Research Reports
GUGG-SHIPPING (SEA): ETF Research Reports
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