McCall’s Call: Transport ETFs Create Choices

By Matthew D. McCall,

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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.

Matthew D. McCall 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 looking.

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 ( LUV ) showed a 5 percent traffic gain in June, while Continental's ( CAL ) 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 duplicative.

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 Transportation Index.

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.

Final Picks

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 broad-based IYT.

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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Copyright ® 2010 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: CAL , FAA , IYT , LUV , PTRP , SEA

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