- The iShares Transportation Average ETF (IYT) will be undergoing a significant renovation this summer as the index behind the $2.1 billion ETF changes.
- The index IYT will soon track generated stronger risk-adjusted performance than the current one. But CFRA believes investors need to understand what is or will be inside an ETF as holdings will drive future performance.
- The shift to a market-cap-weighted index, from a price-weighted one, will result in reduced exposure to FedEx (FDX) and Kansas City Southern (KSU) and much higher stakes in Union Pacific (UNP) and United Parcel Service (UPS).
- Meanwhile, Lyft (LYFT), Old Dominion Freight Line (ODFL) and Uber Technologies (UBER) and many small cap companies are part of the index that IYT will begin tracking in July.
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The largest U.S.-listed transportation ETF is awaiting reconstruction. For nearly 18 years, IYT has provided diversified exposure to air freight and logistics, airlines, railroad and trucking companies.
The $2.1 billion ETF tracks the price-weighted Dow Jones Transportation Average Index and has been a longtime barometer for the transportation segment of the market given the ETF’s focus on large cap companies. However, in mid-May, iShares announced plans to change the index IYT will track in July.
While CFRA believes investors need to look at more than the historical track record of an ETF to make an informed decision, there is a long history for IYT’s pending index worthy of scrutiny. We focus on the last three-plus calendar years, but more info can be found at www.spglobal.com.
In Figure 1, we highlight the performance differences between the current index behind IYT (the Dow Jones Transportation Average), the pending index behind IYT (the S&P Transportation Select Industry FMC Capped Index) and the index behind the $671 million SPDR S&P Transportation ETF (XTN) (the S&P Transportation Select Industry Index).
(For a larger view, click on the image above)
Differences In Weighting
The two S&P named benchmarks hold the same securities, but the one soon to be tracked by IYT incorporates a market-cap-weighted approach, not an equal-weighted approach used by the index behind XTN. The pending IYT benchmark lagged the current benchmark by more than 400 basis points in the first four months of 2021 and the one used by XTN by more than 700 basis points.
However, in 2019 and 2020, the pending S&P benchmark for IYT generated stronger gains than the Dow Jones one used by IYT, while in 2018 the pending benchmark lost less ground than the current one as well as the different S&P one used by XTN. Such performance differences highlight the challenges of focusing on the rearview mirror alone.
The recent success of the pending S&P benchmark has also occurred without additional volatility. In the three-year period ended April 2021, the S&P Transportation Select Industry FMC Capped Index had a standard deviation of 25.7, in line with the Dow Jones Transportation Average Index of 25.6, but a higher risk-adjusted Sharpe ratio of 0.65 (0.61 for the Dow Jones index).
Shifts In Holdings
What’s inside IYT will be significantly changing, according to CFRA Research. IYT currently tracks a price-weighted index of 20 large cap transportation companies, but will be shifting to a market-cap-weighted index that currently has 41 large, mid and small cap companies. Beyond the number of companies doubling in size, the weights for many existing positions will change.
For example, railroad company KSU represented the top overall weighting for IYT at the end of April at 11% due to its high $300-plus stock price, but the railroad was the ninth largest position in the pending S&P index, with a 4.0% stake. Meanwhile, air freight & logistics company FDX had a 12% position in the ETF, but the stock would have represented a more modest 4.4% weight had the ETF been tracking its future S&P index.
(For a larger view, click on the image above)
IYT will be boosting its stake in UNP and UPS in July. At the end of April, railroad company UNP had a 9.2% weighting in IYT, but the railroad company represented a nearly 17% stake in the S&P benchmark soon to be tracked.
Meanwhile, IYT’s 7.1% weighting for air freight & logistics company UPS is more than twice as large, at 17%. Even with higher stakes in by UNP and UPS, the top 10 holdings for the S&P Transportation Select Industry FMC Capped Index was 72% of the benchmark at the end of April, which is a slight reduction from the 77% for the current benchmark for IYT.
UBER and ODFL will be added to IYT in July. Fast-growing ride-sharing and meal delivery servicing company UBER is classified as a trucking company in GICS, and its nearly $90 billion market capitalization represented 9% of IYT’s pending benchmark at the end of April. The stock, like fellow Trucking company ODFL, is currently not part of IYT. At the end of April, ODFL comprised a 3.8% share of the S&P Transportation Select Industry FMC Capped Index and was one of its top 10 positions.
A Smaller Cap Tilt
Many smaller transportation companies will also provide added diversification benefits to the ETF. In Figure 3, we list 10 additional companies that will likely be added to IYT as they are currently part of the pending benchmark.
While many investors are familiar with large cap LYFT, many other companies are below the radar. For example, air freight & logistics companies such as Air Transport Services Group (ATSG), Forward Air Corporation (FWRD) and Hub Group (HUBG) have recent market capitalizations below $3 billion. We expect trucking companies ArcBest Corp (ARCB), Heartland Express (HTLD), and Marten Transport (MRTN) will also be joining IYT.
While IYT will have modest stakes in small caps, we expect the share prices of these transportation companies will likely become impacted as they become part of a $2 billion-plus fund.
|Ticker||Name||Subindustry||Market Cap ($B)|
|ATSG||Air Transport Services Group||Air Freight & Logistics||1.5|
|ECHO||Echo Global Logistics||Air Freight & Logistics||0.9|
|FWRD||Forward Air Corp||Air Freight & Logistics||2.7|
|HUBG||Hub Group||Air Freight & Logistics||2.4|
|MIC||Macquarie Infrastructure||Airport Services||3.1|
While a replacement of an index for a long-standing and popular ETF is uncommon, when it occurs, investors need to look inside and not just at past performance of the index or the fund. The addition of large and small cap companies will make IYT a different portfolio and result in meaningful stock-specific turnover. CFRA’s ETF research and data help keep investors informed.
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