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 the broad market as it indicates 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 the first 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.
In fact, overall economic environment remains somewhat positive as indicated by encouraging economic data with home sales and factory sales supporting the growth picture and employment data rising (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. This has resulted in transport sector reaching the present peak.
The bullish trend in the industry is quite palpable with the performance of the ETFs tracking the industry namely the SPDR S&P Transportation ETF (XTN) and the iShares Dow Jones Transportation Average Index Fund (IYT). Both ETFs have been on a tear, beating out broad markets.
In the year- to date period XTN has produced a return of 21% while IYT has gained 17.1% thereby beating the broader market index as represented by SPDR S&P 500 (SPY) which registered a gain of 9.67% in the same time period (3 ETFs Beating the S&P 500).
However, the recent earnings miss by FedEx (FDX) brought a halt in the rally of transport ETFs, and especially for IYT. Sustained weakness in international air freight markets along with customers looking for inexpensive ways to transport goods led to the disappointing earnings of the company for the recent period.
FedEx accounts for a significant portion in IYT, while XTN has assigned it a very small portion. Federal Express makes up close to 7.6% of total assets in IYT, enough to make the company the third biggest holding while in XTN it occupies just the 29th position with a share of 2.97%.
However, a single earnings miss by FedEx does not really dim the prospect of the whole transport sector. In fact, with the economy gaining strength, the sector is all set to rebound further in 2013. If anything, the impact of the FedEx earnings miss is seen as a short term phenomenon that will not last long (Three Surging ETFs with Strong Momentum).
In light of this, it may be the time to make an allocation to the broad sector in the hope that the recent trend in the space will continue and that the highly sensitive sector will continue to display strong growth momentum. To accomplish this task in basket form, investors should look to either of the transport ETFs that we have highlighted below:
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 $783.1 million and trades at volume level of more than 1.5 million 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%, 17.36%, and 15%, respectively.
Top holdings include railroad operator Union Pacific at roughly 12.1% of assets while Kansas City Southern and FedEx take the next two spots making up nearly 16.6% of the total assets between them.
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 asset base. The fund manages an asset base of $38.9 million and trades at volume level of 7,600 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 & logistics, 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).
In terms of individual holdings, US Airways Group, Alaska Air Group Inc, and Hunt J B Transportation Services Inc occupies the top three positions in the fund with a share of 3.63%, 3.58%, and 3.48%, respectively.
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