Different Drivers Fuel Dispersion In Transport ETFs

Different weighting schemes of the three transport ETFs produce different results.

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Reviewed by: Cinthia Murphy
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Edited by: Cinthia Murphy

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%.

 

Twice As Many Stocks In XTN

Compare that to XTN’s equal-weighted take on the transportation segment. XTN, with twice as many securities as IYT, tracks a broad-based, equal-weighted index that offers different sector tilts.

Ground freight companies represent roughly half of XTN’s portfolio—more than IYT’s exposure—but it’s airlines as a segment that follows, with a 27% weighting. Air freight here stands at only 13% of the overall mix. That’s about half the exposure that a market-cap-weighted take on the segment would provide.

The fund’s biggest holdings aren’t FedEx and UPS, but are the likes of JetBlue, Swift Transportation and Southwest Airlines. In the end, none of the 43 holdings represents more than 3% of the portfolio; meaning, no single stock carries a whole lot of weight in leading this ETF’s performance.

But IYT’s outperformance is not always the case. A look at these two funds’ total returns in the past three years shows XTN’s upper hand, delivering 3 percentage points more than IYT in the same period. Sometimes equal-weighting works to dilute the impact of any poor performance by a single stock.

XTN also has a better record of tracking its underlying index, showing a media tracking error of -0.22% in the past 12 months. IYT’s median tracking error currently sits at -0.26%. 

Key Liquidity Stats

In a broader sense, IYT is the veteran here, and the most popular—and most liquid—fund of the two.

Having come to market in 2003, IYT has gathered some $1.25 billion in about 13 years. The fund also trades more than $51 million on average every day, with a spread of only 0.04% on average. It’s pretty liquid.

XTN, meanwhile, has only $260 million in assets gathered since launch six years ago. The fund is cheaper, with an expense ratio of 0.35%—compared to 0.44% for IYT—but it doesn’t trade as efficiently.

Averaging only $3.4 million in daily volume, XTN trades with an average spread of 0.12%—three times as wide as IYT’s.

 

Newcomer Vying For Investor Attention

We would be remiss not to mention that while IYT and XTN dominate investor choice in this segment, there’s one new transportation ETF vying for a seat at the table.

The First Trust Nasdaq Transportation ETF (FTXR) came to market last fall, and has only $2.4 million in assets gathered since its launch in September 2016. The fund has yet to find traction. It probably doesn’t help that FTXR is also the most expensive in this segment, with an expense ratio of 0.60%—almost twice that of XTN.

Still, the fund offers yet another alternative weighting scheme to market capitalization in transports. And so far this year, despite total lack of investor attention, it’s the best-performing ETF of the bunch. 

Charts courtesy of StockCharts.com

FTXR uses a multifactor approach that picks stocks by their liquidity, and weights them based on volatility, value and growth factors. Ground freight leads sector exposure here too, but only with a 34% weighting. Airfreight snags about 15% of the mix. No single stock can represent more than 8% of the portfolio in this 30-name basket.

It remains to be seen if investor dollars will follow FTXR’s solid performance out of the gates.

Contact Cinthia Murphy at [email protected]

 

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.