Transportation stocks, traditionally residents of the industrial sector, are scuffling a bit this year. The Dow Jones Transportation Average Index is higher by just under 14% year-to-date, while the Industrial Select Sector SPDR (NYSEARCA:XLI) is up 17.71%.
There’s a dichotomy brewing over the near-term for transportation stocks and the relevant exchange-traded funds (ETFs). On one hand, the U.S. economy remains firm and the Federal Reserve recently lowered interest rates, a potential boost for riskier assets. On the the other hand, the U.S./China trade spat is once again escalating, and as last week’s price action confirms, transportation ETFs do not like those headlines.
“The domestic transportation sector is a widely perceived leading indicator of the U.S. economy,” according to Morningstar. “While some traffic is less economically sensitive, such as agricultural products, much of the demand for transportation companies’ freight correlates to economic activity.”
For as important as transportation equities are in gauging the health of the broader economy, there are not many transportation ETFs and their combined assets under management are not big. Additionally, it has been nearly two years since a new transportation ETF has come to market, but there are some interesting options in the group to consider.
Transportation ETFs to Buy: iShares Transportation Average ETF (IYT)
Expense Ratio: 0.43%, or $43 annually per $10,000 invested
The iShares Transportation Average ETF (NYSEARCA:IYT) tracks the aforementioned Dow Jones Transportation Average and it is the largest transportation ETF on the market. IYT holds just 20 stocks and is heavy on familiar names such as Union Pacific (NYSE:UNP), FedEx (NYSE:FDX) and UPS (NYSE:UPS), all economic bellwethers.
FedEx, one of the more important components in IYT, dabbles in the rapidly growing e-commerce arena, but the real long-term catalyst for the company may be its freight-forwarding operation.
“The firm’s foray into freight forwarding opens a network effect moat source because each additional office in this business makes the rest of the system more valuable to shippers,” according to Morningstar. “We also like this business for diversifying away from such asset intensity present in the rest of the company.”
The near-term overhang for IYT is how its railroad components, four of which reside among the fund’s top 10 holdings, deal with tariff talk. Case and point: IYT slumped 3.66% last week.
SPDR S&P Transportation ETF (XTN)
Expense Ratio: 0.35%
The SPDR S&P Transportation ETF (NYSEARCA:XTN) is the equal-weight alternative to the cap-weighted IYT. XTN’s lineup is more than double the size of IYT’s and the former allocates just 2.94% to its largest holding. Plus, the SPDR ETF reduces railroad exposure (less than 13%).
XTN, which is more than eight years old and the second-largest transportation ETF behind IYT, “seeks to provide exposure to the transportation segment of the S&P TMI, comprises the following sub-industries: Air Freight & Logistics, Airlines, Airport Services, Highways & Rail Tracks, Marine, Marine Ports & Services, Railroads, and Trucking,” according to State Street.
The weighted average market value of XTN’s holdings is $17.6 billion, indicating that as smaller transportation stocks flourish, this fund offers some potential for out-performance.
Invesco S&P SmallCap Industrials ETF (PSCI)
Expense Ratio: 0.29%
The Invesco S&P SmallCap Industrials ETF (NASDAQ:PSCI) is the small-cap answer to the aforementioned XLI and as its name implies, is a dedicated industrials fund, not a proper transportation ETF. However, PSCI does have some transportation ETF credibility as more than 10% of its 95 holdings are transport names.
PSCI, components, which have an average market value of $2.18 billion, “are principally engaged in the business of providing industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace and defense and general manufacturing,” according to Invesco.
Interestingly, PSCI has performed inline with the large-cap XLI over the past three years, but the small-cap fund has been more volatile. More impressively, PSCI outpaced the S&P SmallCap 600 Index by more than 800 basis points over that stretch, indicating that this is a transportation ETF with long-term potential.
Global X U.S. Infrastructure Development ETF (PAVE)
Expense Ratio: 0.48%
Like the aforementioned PSCI, the Global X U.S. Infrastructure Development ETF (CBOE:PAVE) is not a dedicated transportation ETF, but it merits a place on this list because it allocates almost 14% of its weight to railroad stocks.
There are important intersections between transportation companies and efforts to shore up America’s decrepit infrastructure and with the 2020 presidential campaign off and running, investors can expect to hear more about infrastructure spending in the coming months.
“We view mixed control of Congress as a positive for infrastructure,” according to Morningstar. “Increased infrastructure funding is a relatively easier issue for which to find bipartisan support than legislation regarding other issues like healthcare or immigration reform. In fact, following the results of the midterm elections, leaders of all three bodies–President Donald Trump, House Speaker Nancy Pelosi, and Senate Majority Leader Mitch McConnell–discussed infrastructure positively.”
Cushing Transportation & MLP ETF (XLTY)
Expense Ratio: 0.65%
The Cushing Transportation & MLP ETF (NYSEARCA:XLTY) is an interesting spin on traditional transportation ETFs because the fund mixes members of the Dow Jones Transportation Average with master limited partnerships (MLPs) from the Cushing MLP Index.
“To construct the transportation component of the portfolio, the fund re-weights the transportation industry group by dividend yield, subject to a cap of 6% weight per holding. Then, the smallest holdings are removed until all firms have a weight of at least 1% in the final portfolio,” according to ETF.com.
XLTY caps MLP exposure at 25% to avoid pesky taxation issues related to the asset class, but the fund’s exposure to MLPs is enough to give it an attractive dividend yield relative to other transportation ETFs.
Invesco Shipping ETF (SEA)
Expense Ratio: 0.66%
The Invesco Shipping ETF (NYSEARCA:SEA) has been around for over nine years, but remains overlooked in the transportation ETF conversation. SEA tracks the Dow Jones Global Shipping Index and offers somewhat of a sophisticated investment concept as it is a play on the rates shipping companies charge to move commodities, such as coal and oil, around the world.
This investment niche isn’t for conservative investors as SEA is volatile compared to traditional transportation ETFs. Translation: SEA can go from hot to not in a heartbeat. A recent rally in the fund quickly evaporated as markets priced in why the rally occurred in the first place.
“While a large part of this strength is attributed to a pickup in iron-ore shipping activity, the other element is reportedly lower vessel availability due to ongoing scrubber installations,” according to ING.
In its favor, SEA has a 12-month distribution rate of 3% and nearly two-thirds of its holdings are classified as value stocks.
SPDR S&P Kensho Smart Mobility ETF (HAIL)
Expense Ratio: 0.46%
The SPDR S&P Kensho Smart Mobility ETF (NYSEARCA:HAIL) is a play on the future of transportation and it’s reasonable to expect that at some point, Lyft (NASDAQ:LYFT) and Uber Technologies (NYSE:UBER) will reside in this transportation ETF.
As it stands today, HAIL features a gutsy lineup as Nio (NYSE:NIO) is its largest holding.
This transportation ETF “seeks to track an index that is designed to capture companies whose products and services are driving innovation behind smart transportation, which includes the areas of autonomous and connected vehicle technology, drones and drone technologies used for commercial and civilian applications, and advanced transportation tracking and transport optimization systems,” according to State Street.
HAIL is diverse compared to older transportation ETFs with exposure to more than a dozen industries. It’s not your father’s transportation ETF, but if you’re looking for growth in this usually staid arena, HAIL is one of your best bets.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.