Transportation ETFs: Ready To Trek Higher?

MarketsETF Trends

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The first quarter was unkind to transportation stocks and the related transportation ETFs. For example, the iShares Transportation Average ETF (CBOE: IYT) and the SPDR S&P Transportation ETF (NYSEArca: XTN) lost an average of 2.75% in the first three months of the year. However, some analysts believe transportation stocks are poised to rebound.

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IYT tracks the Dow Jones Transportation Average (DJT). Transportation stocks were expected to benefit from lower oil prices and while that has been the case for airline stocks, other industry groups represented in IYT, including railroads, have lagged broader equity benchmarks. XTN is an equal-weight spin on the transportation sector.

“Transportation stocks have been getting cheaper versus the S&P 500 since 2010 though earnings have increased at a faster pace,” reports Barron's, citing strategists at Pavilion Global. “That divergence comes despite that fact that transports have outperformed the S&P 500 since the financial crisis, and also outperformed industrials since the 2016 election.”

What Drives IYT

The $813.4 million IYT holds 20 stocks and allocates over 14% of its weight to FedEx Corp. (NYSE: FDX). Air freight and logistics providers represent almost 29.6% of IYT's weight while railroad operators are over 25% of the ETF's roster.

“A surge in corporate capital-expenditure spending, improving business confidence and a weak dollar could boost inflationary pressures in the U.S., and transport stocks are better positioned to handle higher interest rates that stem from better economic growth,” according to Barron's. “(Pavilion Global strategists) point to another bullish sign for the sector: Manufacturers are reporting longer delivery times from suppliers, suggesting transportation firms’ order books are full.”

Related: As Buffett Considers Owning an Entire Airline, Look to This ETF

The equal-weight XTN features exposure to Air Freight & Logistics, Airlines, Airport Services, Highways & Rail Tracks, Marine, Marine Ports & Services, Railroads, and Trucking companies. That ETF holds 42 stocks, none of which exceed weights of 2.75%. Trucking and airline stocks combine for 57% of XTN's weight.

There are encouraging fundamental factors for airlines, including low oil prices. Fuel is the largest input cost for airlines. The improving U.S. economy could encourage more business and leisure travel and airlines are generating impressive amounts of cash.

For more information on Transportation ETFs, visit our Transportation category.

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