As an exchange traded fund tracking a cyclical group of stocks, the iShares Transportation Average ETF (NYSEArca: IYT) may not be the first idea that comes to mind when investors think of ETFs that can help them ride out an economic slowdown.
IYT seeks to track the investment results of the Dow Jones Transportation Average Index composed of U.S. equities in the transportation sector. The underlying index measures the performance of large, well-known companies within the transportation sector of the U.S. equity market.
Some market observers believe trucking stocks, integral components of the Dow Jones Transportation Average Index, could prove surprisingly durable in a recession. The transportation sector is widely viewed as a gauge for economic activity since the companies transport the raw materials and goods that power the economy and manufacturing.
Investing In IYT ETF
IYT holds 20 stocks, just over 16% of which are trucking names.
“In the past, heavy- duty truck purchases were largely driven by changes to emissions limits set forth by governments around the world. Buyers would rush to buy trucks before new, costlier models with advanced environmental technology were required by regulators,” reports Al Root for Barron’s.
Stability in the trucking business is increasing, but that factor currently is not priced into trucking stocks, indicating the group remains attractively valued.
“The additional stability isn’t reflected in stock prices. Paccar trades for 10.5 times estimated 2019 earnings and Navistar trades for 9.4 times, big discounts to their historical averages and other industrial stocks,” according to Barron’s.
The transportation index is a key metric for analysts to watch in terms of assessing the health of the broad market. As far as any potential roadblocks for transportation ETFs, given the way the sector has risen at a rapid rate thus far this year, the rally could stall at some point.
The transport segment was particularly hit hard in the wake of rising global growth concerns and the escalating U.S.-China trade war rhetoric. However, things are looking up as the Federal Reserve hinted that it could ease up on interest rate hikes, along with stronger-than-expected corporate earnings and easing global trade war fears. IYT is up nearly 11% this year.
For more information on Transportation ETFs, visit our Transportation category.