Several US economic indicators are pointing to a strengthening of the economy. For instance, metrics released by the Census Bureau show that retail and food services sales increased 9.8% in March from the previous month and 27.7% year-over-year. Also, in April, the Conference Board's Consumer Confidence Index rose to 121.7 from 109.0 in March.
Therefore, today we introduce two exchange-traded funds (ETFs) in the transportation sector that could potentially benefit from further economic recovery. Recent research by Steven Polzin and Tony Choi of the Office of the Assistant Secretary for Research and Technology highlights transportation is "fundamental to peoples' economic and social needs... The resumption of pre-COVID-19 economic and other activities will depend on the ability to return to normal life and work safely... The rate of economic recovery will substantially affect the demand for all kinds of transportation."
So far in the year, the widely-followed Dow Jones Transportation Average, a 20-stock, price-weighted index, is up 22%. DJT measures the performance of large, well-known companies within the transportation sector in the US. On a side note, history buffs might be interested to know that this index was created in July 1884 by Charles Dow.
It was initially called the Dow Jones Railroad Average as, "at the end of the 19th century, the most important sector of the United States economy was that of railway transport.” At the time, Charles Dow was the editor of The Wall Street Journal and co-founder of Dow Jones and Co., which was acquired by S&P Global (NYSE:SPGI) in 2011.
Let’s look at the ETFs.
1. iShares Transportation Average ETF
- Current Price: $268.92
- 52-Week Range: $133.08 - $270.46
- Dividend Yield: 0.77%
- Expense Ratio: 0.42% per year
The iShares Transportation Average ETF (NYSE:IYT) invests in US-based airline, railroad and trucking companies. The fund started trading in October 2003 and has $2.2 billion in net assets.
IYT, which holds 20 stocks, tracks the returns of the Dow Jones Transportation Average Index. Railroad stocks have the highest share with 36.19%. They are followed by air freight and logistics (27.38%), trucking (20.15%), airlines (10.88%) and marine (5.2%). The top 10 holdings comprise about 77% of the total ETF.
Railway operators and transportation groups Kansas City Southern (NYSE:KSU) and Norfolk Southern (NYSE:NSC); express package delivery services FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS) are among the leading names in the roster.
So far in the year, IYT has returned 22% and hit a record high in recent days. Given its rapid increase in recent weeks, short-term profit-taking is likely. However, in the long-run, the strength in the price of the fund could continue. Most analysts concur that when IYT (or the transportation sector) participates in the market rally along with other sectors, it is typically a bullish sign for the broader market.
2. SPDR S&P Transportation ETF
- Current Price: $88.75
- 52-Week Range: $42.95 - $90.35
- Dividend Yield: 1.37%
- Expense Ratio: 0.35% per year
The SPDR® S&P Transportation ETF (NYSE:XTN) also invests in transportation shares. The sub-industries include: air freight and logistics, airlines, airport services, highways and rail tracks, marine, marine ports and services, railroads and trucking.
XTN, which tracks the S&P Transportation Select Industry Index, currently has 41 holdings. The fund began trading in January 2011 and has $672 million net assets. Trucking gets the highest share with 33.11%, followed by airlines (24.29%) and air freight and logistics (23.32%).
About 27% of the fund is invested in the top 10 stocks. Kansas City Southern; auto rental company Avis Budget (NASDAQ:CAR) Atlas Air Worldwide (NASDAQ:AAWW), which provides aircraft and aviation operating services; freight group XPO Logistics (NYSE:XPO), which provides supply chain solutions; and logistic company Expeditors International (NASDAQ:EXPD) are several of the leading names in the ETF.
Year-to-date, XTN is up 24% and saw an all-time high in early April. Like IYT, profit-taking could also put pressure in the names in the fund. However, long-term, we are bullish on the sector. Interested readers could regard $85 or below as a better entry point.