January brought a brisk start to 2020 for investors. Between a gusher of earnings reports and the new coronavirus outbreak, a new story is seeping into February. Lost in all that commotion are some deeper market trends, including the laggard status of transportation equities.
Over the course of history, market observers have often used the Dow Jones Transportation Average Index as a tell for upcoming moves on the Dow Jones Industrial Average, but the transport’s gauge doesn’t seem to be getting the attention it used to.
That might be a good thing because, to start 2020, the transportation index is up just 0.2% while the SPDR S&P 500 ETF (NYSEARCA:SPY) is higher by 3.4%. Here’s another not-so-fun fact for transportation fans: the Dow Jones Transportation Average topped SPY just twice in the six years spanning 2014 to 2019.
For investors currently mulling transportation exchange traded funds, the good news at the moment may just be that there’s a limited universe (just seven) to examine. For patient market participants, there are some forward-looking funds that may be worth a glance in the future, but for now it may be best to leave most transportation ETFs sitting on the tarmac.
iShares Transportation Average ETF (IYT)
Expense ratio: 0.42% per year, or $42 on a $10,000 investment
The iShares Transportation Average ETF (CBOE:IYT) is the largest transportation ETF and tracks the aforementioned Dow Jones Transportation Average. Currently, IYT faces multiple problems. First, there’s the fund’s 17.31% weight to airlines, a group that will be pinched by the coronavirus epidemic.
Remember the SARS pandemic earlier this century? It cost global airlines $7 billion, but that figure could be significantly higher when the “Wuhan virus” issue is finally put to bed. Even if one argues that IYT’s airline components are American carriers, which is true, that doesn’t carry the day because some domestic airlines are canceling China flights and that’s lost revenue.
Even if an investor is bold enough to gloss over the near-term airline issue with this transportation ETF, there’s another, longer-ranging scenario to ponder: the changing mix of American energy consumption. IYT allocates 36.48% of its weight to railroad operators, many of which haul coal and other fossil fuels. As has been noted, those aren’t the places to be in the energy world these days.
First Trust Nasdaq Transportation ETF (FTXR)
Expense ratio: 0.60%
The First Trust Nasdaq Transportation ETF (NASDAQ:FTXR) is outperforming IYT this year with a gain of 1.59%, but that’s not worth writing home about. FTXR uses a unique methodology relative to rival funds in this space as growth, value and volatility are part of its scoring system.
However, the secret to FTXR’s success isn’t much of a secret at all. The fund allocates 4.53% of its weight to Tesla (NASDAQ:TSLA), a rarity among transportation ETFs.
Problem is that if Tesla suffers some more days like it endured Wednesday, Feb. 5, that’s going to weigh on FTXR. The second problem for FTXR is its more than 34% allocation to airline stocks, obviously a challenging trait in the current environment.
Bottom line: investors looking to access Tesla via ETFs have better options to consider than FTXR.
Direxion Daily Transportation Bull 3X Shares (TPOR)
Expense ratio: 0.98%
This one is self explanatory because the Direxion Daily Transportation Bull 3X Shares (NYSEARCA:TPOR) is the triple-leveraged answer to the aforementioned IYT, meaning the Direxion fund looks to deliver triple the daily returns of the Dow Jones Transportation Average.
That’s great for an active trader that can catch transports on the right day, but there haven’t been many of those days in recent weeks.
Unfortunately, TPOR isn’t one of the leveraged ETFs that has a inverse equivalent. If such a fund existed, that might be the preferred way to play transportation stocks over the near-term.
As of this writing, Todd Shriber did not own any of the aforementioned securities.