Kotok: Buying Transports; Holding Utilities

October 21, 2014

ETF.com INSIGHT

iShares Transportation Average (IYT | B-68)

SPDR S&P Transportation (XTN | A-60)

Kotok believes transport companies have the ability to finance themselves and that they are relatively sheltered from Europe's woes. He sees the sector's steep sell-off as overdone and Kotok has recently deployed cash in transports. There are only two transportation ETFs, but neither fund offers vanilla, cap-weighted coverage, so holding both IYT and XTN makes sense for comprehensive coverage of the space. The $1.4 billion IYT holds roughly 20 transport companies but is price-weighted, creating skews by favoring companies with the highest share-price handle. The smaller $264 million XTN has a wider scope holding 47 companies, but its equal-weighting scheme gives the fund a small-cap tilt. Fortunately, both ETFs offer robust block liquidity, and even for the retail folks, the "less liquid" XTN trades more than $2 million a day at manageable spreads.

Utilities Select SPDR ETF (XLU | A-95)

Kotok specifically calls out the Utilities Select SPDR ETF (XLU | A-95) as his choice for exposure to utilities. As a tactical call, the fund is hard to argue against. XLU has outstanding liquidity. And if you end up owning it for a while, as Kotok has, true holding costs are low and stable. While competing fund VPU offers slightly better exposure to utilities in our view, the difference is truly marginal. Performance for the competing Vanguard Utilities ETF (VPU | A-99) has indeed been strong year-to-date, but there’s one thing to watch out for in the entire space: It may stumble if interest rates rise due to its steady and substantial dividend yield.

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