Different Drivers Fuel Dispersion In Transport ETFs

February 23, 2017

The performance of transportation stocks can offer clues as to whether a U.S. stock market rally still has legs to run further. That’s the idea behind a decades-old market theory known as the Dow theory of stock price movement.

According to the theory, a bull market in industrials will not last unless transportation is also rallying. For a market to be truly strong, goods need to be fabricated, but the transportation of those manufactured goods need to be alive and well.

So far this year, transportation stocks have not only been rallying, they were leading market gains for much of the time. The Dow Jones Transportation Average, an index that tracks the performance of transportation stocks such as railroads and FedEx, hit a closing high of 9554.35 late last week, tallying up to more than 6% in gains year-to-date.

Benchmark Retreating

The benchmark has since retreated slightly to the 9400s-level, but it’s still up a healthy 4% for 2017. The Dow Jones industrial average, meanwhile, at a high of 20760.89, is up about 5% so far this year.

In the ETF market, investors have a few transportation ETFs to choose from, in a space dominated by two funds. They are the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN).

The performance of these ETFs shows notable return dispersion thanks to the funds’ underlying construction as seen below and compared with the SPDR Dow Jones Industrial Average ETF Trust (DIA) to show the relative performance of transports versus industrials this year: Year-to-date, it’s IYT that’s leading in performance.

No Market-Cap Weighting Here

One common characteristic between these funds is that neither offers a vanilla market-cap-weighted representation of the transportation segment. Transports are known for heavy concentration on a few names, and IYT and XTN each target that problem with different weighting schemes.

IYT is price-weighted, providing “idiosyncratic” exposure to the transportation segment, according to our data. The fund’s design tends to offer greater exposure to the most expensive transportation stocks regardless of market cap due to its one-share-per-security approach. The overall portfolio has only 20 securities.

From a segment perspective, ground freight companies lead the mix, with a 42% weighting—companies like FedEx and UPS are the IYT’s largest holdings, at 12.5% and 7.5%, respectively. Air freight is the second-largest segment allocation, at nearly 24%.


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