The transportation industry occupies an important niche in the
world market and includes movement of freight and passengers
through different modes such as rail, trucks, ships, and air. It
is highly competitive, capital intensive and depends largely on
the global demand of exports and imports.
While growing industrial production, government infrastructure
investments, mining activities, and increasing mergers and
acquisitions would boost growth in this segment, capacity
constraints, fuel price volatility, declining trades, ongoing
turmoil in Europe, slowdown in emerging markets and stringent
regulations might act as headwinds to the industry as a whole
Is It Time To Buy The Transportation ETFs?
North America dominates the global growth in the space, and
now, with another round of monetary stimulus measures to spur the
economy, the nation is expected to register solid growth over the
next few years.
This is important to transports because according to the
, both transportation and industrial should certainly move to new
highs when the market booms.
However, the transportation is still lagging the broad
industrial sector (read:
Three Industrial ETFs Outperforming XLI
). The transportation sector, as depicted by the Dow Jones
Transportation Average index, is down nearly 2% while the
industrial sector, as indicated by the Dow Jones Industrial
Average index, is up by about 10%.
This wide gap represents a huge upside potential in the
transportation space, suggesting that investors could capitalize
on the current opportunity. This can be easily done by investing
in the iShares Dow Jones Transportation Average Fund (IYT), which
is a #1 Zacks ETF Rank (Strong Buy) fund.
We expect it to outperform its peers with a similar (medium)
risk level over the next year (see more ETFs in the
). Given this, the product could be worth a closer look by
investors seeking exposure to this important sector.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in
the context of our outlook for the underlying industry, sector,
style box, or asset class. Our proprietary methodology also takes
into account the risk preferences of investors. ETFs are ranked
on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also
receive one of three risk ratings, namely Low, Medium, or
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, the Zacks Rank reflects the expected return of
an ETF relative to other products with a similar level of
For investors seeking to apply this methodology to their
portfolio in the U.S. transportation market, we have taken a
closer look at the top ranked IYT below:
iShares Dow Jones Transportation Average Fund
This fund, launched in October 2003, is the most popular ETF
in the space and seeks to match the price and yield of the Dow
Jones Transportation Average Index, before fees and expenses.
IYT generated impressive returns of more than 35% over the
past three years. In comparison,
, which tracks the Dow Jones U.S. Industrials Index, produced
more than 51% of returns over the same period (read:
Zacks #1 Ranked Industrial ETF: IYJ
The fund holds 21 securities in the basket with a nice mixture
of all caps. Large cap stocks account for 40% of the assets while
mid and small caps take 29% and 31% share, respectively.
The product is heavily exposed to the railroad and trucking
industry as this segment makes up nearly half of the portfolio.
Airfreight and logistics takes the second position in the basket,
accounting for roughly 27% of exposure, followed by airlines,
which make up for only 12% share (read:
Is It Time to Buy The Airline ETF (FAA)?
The fund is not widely spread across individual securities, as
it puts around 70% of its assets in the top 10 holdings. Union
), FedEx (
) and Kansas City Southern (
) take the top spots in the basket and combined make up for 29%
share. This suggests that company-specific risk is high in the
case of IYT and the top 10 holdings dominate the returns of the
About half of the fund's portfolio has a growth style, which
means the securities in the fund target the growing segment of
the market. The growth fund arguably offers above-average revenue
and earnings growth with high price-to-equity (P/E) and
price-to-book (P/B) ratios but yield lower than the value and
blend counterparts. The ETF has a P/E ratio of 17.58 and P/B
ratio of 3.72.
Growth funds also increase more than the other funds in bull
markets, although they also fall more drastically in bearish
Three Best Performing Small Cap Growth ETFs
). Since many are looking for a modest recovery, growth funds
seem like a decent choice for those expecting a return to market
health in the fourth quarter.
The ETF is widely traded in average daily volumes of more than
400,000 shares, ensuring that the product has a tight bid ask
spread. Despite this, the product has a relatively high expense
ratio, coming in at 47 bps a year.
IYT has been able to manage assets of $544.4 million but lost
around 2% value so far in the year (as of October 31
). The fund yields a decent dividend of 1.56% annually.
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FEDEX CORP (FDX): Free Stock Analysis Report
ISHARS-DJ US TR (IYT): ETF Research Reports
KANSAS CITY SOU (KSU): Free Stock Analysis
UNION PAC CORP (UNP): Free Stock Analysis
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