A pickup in the economy is translating into double-digit returns for transportation ETFs.
Markets are reaching new highs after a rough first quarter dampened by severe winter weather, and some of that upside action includes double-digit gains in the transportation stocks—a sector considered a good way to gauge the overall health of the economy.
Year-to-date, the Dow Jones Global Shipping Index and the Dow Jones Transportation Average Index are up 6.4 percent and 10.1 percent, respectively, while the S&P 500 Index is up 5.5 percent. Union Pacific Corp., the railroad, has gained upward of 21 percent this year thanks to a pickup in demand for coal and natural gas.
“The first quarter was very difficult for most of the transportation stocks because of the severe weather that we had throughout the U.S. that impacted revenues and earnings of different transportation sectors, including trucking, railroads, logistics,” said Jim Corridore, senior associate director, equity research at S&P Capital IQ.
“But stocks and ETFs that hold these stocks are starting to move up based on optimism about overall demand strength, improving U.S. and global economies,” he added.
The following three related ETFs are currently riding market highs, with more room to run.
3. Guggenheim Shipping ETF (SEA | C-38)
SEA tracks an index of global maritime shipping companies selected by dividend yield and weighted by market cap. The fund is a hybrid: part industry-niche fund and part dividend fund, and its top names are often seen on the sides of huge container vessels, including Maersk and Cosco.
The fund, which tracks the Dow Jones Global Shipping Index, is up almost 7 percent this year, but can potentially make double digits if commodity demand from China picks up, according to Sumit Roy, managing editor of Hard Asset Investor.
“China has been slowing and it’s not providing the demand support for commodities like it once did,” said Roy. “That’s a major reason commodity prices [and SEA] aren’t up more.”
2. iShares Transportation Average ETF (IYT | B-62)
IYT provides exposure to the transportation industry through one of the most archaic weighting schemes in the market: price-weighting, whereby it holds a fixed number shares of the selected stocks and lets the changes in price determine their weights.
The catch is that price levels are rarely indicative of anything, so while IYT holds about 25 percent more FedEx than UPS, UPS’ market cap is slightly higher than that of FedEx.
The fund is up about 11 percent year-to-date, and its top three holdings include Pacific Union, FedEx and shipping transport company Kirby Corp.
“We’re positive on rails and trucking, and we think we’re at the cusp of signs of acceleration in the U.S. economy,” said Corridore. “Railroad companies are doing very well in expanding operating margins and that should continue.”
1. SPDR S&P Transportation ETF (XTN | A-59)
XTN tracks the broad-based, equal-weighted S&P Transportation Select Industry Index of U.S. stocks in the transportation industry, giving it more exposure to smaller-cap names within the industry that tend to pop more than their larger-cap counterparts in a rising market.
In addition, airline names such as Delta Air Lines, American Airlines and JetBlue Airways play a more prominent role in XTN’s portfolio than its competitor IYT. Delta has surged more than 48 percent this year and JetBlue is up 22.5 percent. American Airlines is up almost 69 percent year-to-date, resulting in a gain of more than 15 percent for XTN.
Corridore says his firm is very positive on the airlines space because through mergers and bankruptcies, these companies have reduced competition, improved their balance sheet health and their ability to respond to shifts in demand.
“They have changed their behavior patterns in terms of how they compete, so instead of competing for market share gains and future profitability, they’re competing for sustained profitability now,” he said. “If there is a demand downturn, I think they will cut capacity rather than fares.”
Corridore adds that the first quarter is traditionally the weakest quarter for airlines, whereas Q2 and Q3 are their two strongest, because of summer and holiday travel.
Charts courtesy of StockCharts.com