Over the past three months, the iShares Transportation Average ETF (NYSEArca: IYT), the ETF proxy for the Dow Jones Transportation Average Index, has tumbled more than 8% while the Dow Jones Industrial Average is off just 0.6%
IYT’s equal-weight rival, the SPDR S&P Transportation ETF (NYSEArca: XTN), has fared worse with a 90-day decline of 9.4%. Stymied by tumbling shares of railroad operators and airlines that have surprisingly fallen in unison with oil prices, transportation exchange traded funds have recently been disappointments, but that does not mean IYT and XTN lack for positive catalysts.
“Many of the dynamics that have pressured transportation companies this year are temporary in nature and certainly have the potential to reverse,” said Morningstar analyst Robert Goldsborough in a recent note. “In the meantime, many transports are companies with economic moats, which means that Morningstar’s equity analysts believe they have distinct and sustainable competitive advantages. The transportation sector reflects the health of the overall economy.”
IYT and XTN have the potential to bounce back. When is a different matter. Road and rail revenue is rising and due to their lack of foreign revenue, many of the companies that line IYT and XTN are not vulnerable to a strong U.S. dollar. In fact, some market observers view these ETFs as ideal strong dollar plays, which could also correspond to upside when the Federal Reserve finally raises interest rates. [Transport ETFs Wait on Dollar Rally]
“Revenues and earnings have been in an uptrend for the road & rail industry, in part due to slow but meaningful economic growth in North America. Corridore thinks railroads, such as Union Pacific (UNP), may see volumes and pricing benefit from improved transportation demand, continued growth in petroleum shipping by rail, stabilization in coal volumes and pricing, and steady growth in the shipping of most other commodities,” according to S&P Capital IQ.
IYT allocates 47.1% of its weight to road and rail stocks and another 15.3% to airlines. Trucking and rail shares combine for over 47% of XTN while airlines are the ETF’s second-largest industry weight at 23.3%. [A Different View of Transportation ETFs]
“Morningstar’s equity analysts give wide moat ratings to all six North American Class I railroads, which include the four Class I carriers held in this ETF. Morningstar’s equity analysts have confidence the rails will continue to increase their profitability, and, as a result, their returns on invested capital. Rail companies (23.5% of IYT’s assets) remain the low-cost option by far, where no waterway links origin and destination, offering quadruple the fuel efficiency of trucking per ton-mile of freight. Even for goods that can be shipped by truck, the railroads charge an estimated 10% to 30% less than trucking containers in the same lane. These cost advantages have been bolstered in recent years by significantly upgraded physical plants and improved on-time performance that has restored shippers’ confidence in carriers’ abilities to deliver freight.,” according to the research firm.
As for airlines, there are catalysts abound with that industry, too. On the recent webcast, Why Airline stocks May Still Have Room to Fly: It’s Not Just About Oil, Helane Becker, managing director for Cowen and Company, pointed out that the U.S. airline industry remains strong and is growing as the economy continues to expand. Specifically, for every 1 point gain in the U.S. gross domestic product, airline traffic growth rises about a 1.5 points. [Exploring ETF Opportunity in the Friendly Skies]
The industry is also enjoying lower costs as oil prices have dropped significantly over the past year. International airliners, though, are not seeing the same level of savings as U.S. airlines, since jet fuel is dollar-denominated.
iShares Transportation Average ETF
