Guide to Transportation ETF Investing

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The transportation industry occupies an important niche in the world market and includes movement of freight and passengers through different modes such as rail, trucks, ships, and air. It is highly competitive, capital intensive and depends largely on the global demand of exports and imports (Emerging Markets Dividend ETFs).

Transportation ETFs represent a good investment opportunity during an upswing in the markets. This is why they are often considered to be a barometer of broad economic health, as they indicate that more goods are being moved around, and business activity is gaining strength.

While 2012 was a year of slow growth for the U.S. economy, broad stock markets have remarkably risen this year. Leading indexes like the S&P 500 have pushed higher and posted gains in these few months of 2013 that usually take at least a year to accumulate. This has resulted in many market segments surging higher, including the transport industry.

Transportation Industry in Focus

In general the economic environment remains positive as indicated by encouraging economic data with home sales and factory sales supporting the growth picture. Employment data is also seen to be rising, suggesting that passenger traffic could also be on the upswing (Impact of Positive Jobs Data on ETFs).

Additionally, durable goods orders climbed 5.7% in February as demand for transportation equipment rebounded. These positive trends in the economy suggest that there is rising demand for the movement of goods across many economic sectors, a situation which has helped to boost the transport sector overall.

Moreover, the U.S. rail road sector appears to be in good shape in 2013. The railroad industry is gaining largely from the ongoing conversion of traffic from truckload to rail intermodal. Intermodal is gaining popularity among shippers given its cost effectiveness over truck.

We believe that intermodal will play an important role in driving the rail industry based on the growing awareness among shippers about its benefits. Currently, rail intermodal accounts for over 20% of the railroads’ revenue, second in line after coal. In the coming years, we expect this contribution to only rise given the growing dependence of shippers on intermodal services.

Also, automotive shipments also form a significant part of rail shipments, as automotive sales are set to recover from their downturn in 2009 when U.S. sales hit their lowest in three decades.

On the other hand, the U.S. trucking sector is also set for good growth in 2013. After four years of suffering losses in freight volume and revenue, the industry finally appears to be on the path of recovery due to strong demand.

Increased opportunities related to more freight tonnage and expanding revenue for companies across the U.S. indicate that the industry will continue to see a rise in business.

Airlines also helping

However, going into 2013, the outlook for the global airline industry is likely to remain clouded by the uncertain economic backdrop, particularly the unsettled European situation. These factors are expected to offset the positive impacts from increased passenger traffic and an improved freight market (see Three Surging ETFs with Strong Momentum).

The U.S. airline industry is expected to remain profitable over the next two decades given the improving worldwide trends in air travel. However, growth may be held back until 2015 due to the increase in fuel costs.

Although U.S. airlines experienced sluggish growth over the last few months, the demand for air travel will nearly double over the next 20 years, as predicted by the U.S. Federal Aviation Administration (FAA). Passenger enplanements are expected to grow 2.0% to $746 million in 2013 and about 3% in the future years, reaching $1 billion by 2024 and $1.2 billion by 2032.

With this in mind, it could be time to give this segment a closer look. For investors looking to play the transportation sector, an ETF approach can be a solid idea.

This technique can help to spread out assets among a wide variety of companies and reduce company specific risk for a very low cost. Below, we highlight the ETFs in this sector any of which could play the bullish trends in this segment:

iShares Dow Jones Transportation Average Fund (IYT)

IYT represents the most popular way to track the transport sector. Volume and AUM are both impressive, ensuring that the product has tight bid ask spreads for virtually all investors. Despite this, the product does have a relatively high expense ratio, coming in at 46 basis points a year (Top Ranked Transportation ETF in Focus).

The fund manages an asset base of $593.8 million and trades at volume levels of more than 500,000 shares a day. This asset base is invested in a small basket of 21 securities.

The ETF is heavily exposed to the railroad industry as this segment makes up nearly 30% of the portfolio. Delivery services, trucking and airlines also get double-digit allocation in the fund with a share of 18.7%, 17.75% and 14.5%, respectively.

Top holdings include railroad operator Union Pacific at roughly 12.3% of assets while Kansas City Southern and FedEx take the next two spots making up nearly 16.4% of the total assets between them. The fund has delivered a year-to-date return of 14.4%.

SPDR S&P Transportation ETF (XTN)

XTN holds roughly 39 securities in its basket charging investors just 35 basis points in fees. However, the fund does not appear to be popular among investors as it has a very low trading volume and a small asset base. The fund manages an asset base of $44.5 million and trades at a volume level of 9,300 shares a day.

This fund is also heavily exposed to trucking and airlines as they make up roughly 60% of the total. Beyond this, close to 35% of the total goes to both air freight & logisitics, and railroad companies, which pretty much round out the entire fund except for a 4% allocation to marine firms (Two Sector ETFs Posting Incredible Gains).

Among individual holdings, Hertz Global Holdings Inc, Avis Budget Group and Hunt J B Transportation Services Inc occupy the top three positions in the fund with a share of 3.74%, 3.62% and 3.56%, respectively.

The fund has been a good performer to date as it delivered a year-to-date return of 18.09%.

Guggenheim Shipping ETF (SEA)

iShares MSCI Thailand Investable Market Index ETF is designed to track the performance of the Dow Jones Global Shipping Index. This produces a fund which is home to 27 shipping company stocks.

The fund has been able to amass an asset base of $31.9 million since its inception and trades at a volume level of 25,400 million shares a day. While the ETF does not appear to be popular, its performance has also not been quite remarkable. SEA is the worst performing ETF in the list, delivering a return of -4.78% over a period of one year.

The fund is also guilty of concentration, with company-specific risk running high. The fund assigns 62.8% of the asset base to its top 10 holdings. Among individual holdings, AP Moller, Nippon Yusen and Mitsui Osk Lines take up a share of 17%, 7.99% and 7.63%, respectively. The fund charges an annual fee of 65 basis points.

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