Transportation stocks have long been a proxy for the overall
economic landscape, and investors now have access to four equity
ETFs that focus on different parts of the sector as they search for
ways to profit as the economy recovers unevenly from its worst
downturn since the 1930s.
Having different ETF choices, from a broad-based fund to niche
portfolios focused on airlines, maritime shipping or green
transportation, is a luxury for investors because the outlook for
transportation equities is different depending on where you're
For example, the Association of American Railroads reported rail
traffic for the first week of July that was better than the two
previous years. Carloads were up 18.8 percent compared with the
same period in 2009. News is looking up for airlines too. Southwest
) showed a 5 percent traffic gain in June, while Continental's (
) rose 4.7 percent.
That said, the shipping sector is sending negative signals. The
Baltic Dry Index, a measure of freight around the globe, extended
its losing streak to 31 straight sessions. Because iron ore demand
is the largest source of dry bulk shipping, the slowdown suggests
the global economy, in particular China, could be slowing.
Again, investors these days are lucky to have finely tuned index
products focused on transportation as they try to make sense of the
contradictory indicators in the economy. Unlike many other sector
ETFs, the four U.S. funds focused on transportation aren't
The Big-Picture ETF
The granddaddy of them all is the iShares Dow Jones
Transportation ETF (NYSEArca:IYT), which has been trading since
late 2003. The ETF has over $500 million in assets and seeks to
track the performance of the widely popular Dow Jones
Investors who would like to get a piece of the entire
transportation sector should consider opting for IYT because it
offers exposure to the railroads, airlines, shipping, trucking,
freight delivery, etc. The expense ratio of 0.47 percent is
acceptable and the 1.3 percent dividend yield is a small bonus.
(Full disclosure:My firm owns IYT shares.)
Up, Up And Away
Even though IYT has outperformed the S&P 500 Index so far
this year, airline stocks have done even better.
The Claymore/NYSE Arca Airline ETF (NYSEArca:FAA) is up over 12
percent in 2010 as its 24 airline stocks attract money. The ETF has
a slightly higher expense ratio of 0.65 percent, but that is
acceptable due to the niche exposure it offers. About two-thirds of
FAA's allocation is U.S. companies.
With more consolidation in the sector likely and airlines
beginning to turn things around with a stabilizing economy, the
airline ETF could be well-positioned to continue flying high.
Sailing With 'SEA'
The Claymore/Delta Global Shipping ETF (NYSEArca:SEA) is an
interesting ETF because the original shipping ETF offered by
Claymore closed and a new product was relaunched in June.
Within one month, the ETF has been able to attract $131 million
in assets, a very impressive start for a niche ETF that is highly
leveraged to the overall global economy. The original SEA had
gathered $153 million by the time it closed.
SEA's expense ratio is 0.65 percent, the same as FAA, and there
are a total of 30 stocks in the allocation. One of the benefits of
SEA is the true international exposure; the U.S. only accounts for
a quarter of the portfolio, followed by Greece at 13 percent, then
China and Japan, which make up 10 percent each.
Another feature of SEA is the diversity within the shipping
sector. The ETF includes companies that ship everything from dry
bulk goods to petroleum products, and even includes a
ship-financing firm among its holdings. If the goal is to get an
above-average-risk ETF that is tied to the global economic
recovery, SEA is a great choice.
Renewable Transports ETF
The last ETF in the sector is a small player that has just $5
million in assets, the PowerShares Global Progressive
Transportation ETF (Nasdaq:PTRP). It tracks an index that invests
in companies involved in the advancement of efficient
transportation. Think of electric cars, energy conservation and
efficiency, as well as lithium batteries.
While I'm a big fan of this niche ETF, the lack of assets and
low liquidity force my firm to stay clear at this time. The 38
stocks held by the ETF are spread around the globe, with the U.S.
making up a third of the allocation. The expense ratio of 0.75
percent is acceptable to me and, if you believe in the green
movement, it's a low price to pay for such international
diversification. PTRP is another example of how hard it is for an
ETF with a great idea, but not enough marketing behind it, to get
its name out.
As you've probably figured out by now, I'm a fan of all four of
the transportation ETFs, but only own one at this time, the
Going forward, I'd love to see PTRP begin trading more, and this
would open the door to a buy recommendation. What's more, SEA and
FAA are great niche products that could find their way into one of
my firm's portfolios as well. So stay tuned!
Matthew D. McCall is editor of The ETF Bulletin and
president of Penn Financial Group LLC, a Ridgewood,
N.J.-based wealth management firm specializing in investment
strategies using ETFs.
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