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 9% while the Dow Jones Industrial Average is off just 0.8%.
Wednesday’s 3.6% drop in shares of package delivery giant FedEx (NYSE: FDX) could represent another blow to IYT and rival transportation ETFs because while airline and railroad stocks, major parts of IYT’s lineup have recently flailed, FedEx has held firm.
After the company said it is unlikely to earn the $2.67 per share analysts are expecting for its fiscal first quarter, FedEx’s ability to provide near-term for the struggling IYT and the equal-weight SPDR S&P Transportation ETF (NYSEArca: XTN) is threatened. [Alternative View of Transport ETFs]
“With today’s gap down in FDX, I am looking at $174, below, as marking a dividing line as to whether the recent breakout will hold, or instead will represent a tipping point of the bifurcation discussed above within the sector. We know the airlines and rails are rather beaten-down here, so perhaps a mean-reversion trade could materialize with FDX coming in while the laggards bounce,” according to Chessnwine of MarketChess.
The $870.5 million IYT devotes 13.5% of its weigh to Tennessee-based FedEx, making the stock the ETF’s largest holding by a wide margin over FedEx rival UPS (NYSE: UPS). XTN, home to almost $397 million in assets under management, has a 2.7% FedEx allocation, making the stock the ETF’s fourth-largest holding. Airlines and railroads combine for over 34% of XTN’s weight and nearly 39% of IYT’s lineup.
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]
Still, investors need to be mindful of the potential for more near-term downside in transports before deciding to get involved with the group’s stocks and ETFs.
“But bifurcation is typically an ominous circumstance, and I would not rule out the sector taking another leg down this summer, especially with the what-me-worry attitude by many market players regarding the transports’ weakness this spring,” adds Chessnwine.
iShares Transportation Average ETF
