Transport ETFs Keep On Trucking Higher

Despite the relative flattening in the broader market, the transportation sector has continued to trend strongly higher and has yet to show signs of slowing down.  This sector is often times closely associated with the health of the domestic economy as a result of goods and services being shipped worldwide. 

 The iShares Transportation Average ETF (IYT) tracks 21 publicly traded companies in the railroad, delivery services, trucking, airline, and marine transportation industries.  IYT is based on the Dow Jones Transportation Average Index and its largest holdings include Union Pacific (UNP) and FedEx Corp (FDX).

This ETF has nearly $1 billion in total assets and charges an annual expense ratio of 0.46 percent. 

So far this year, IYT has gained nearly 8 percent, while the SPDR S&P 500 ETF (SPY) has barely eclipsed the 3 percent mark.  IYT recently hit a new all-time high this week as well. 

This pace of outperformance in transportation stocks is clearly a good sign for domestic economic activity, particularly when we are also experiencing higher oil prices in tandem. 

Higher energy costs can work against the strength of the transportation industry because their profitability relies heavily on fuel costs.  The United States Oil Fund (USO) has gained 8 percent this year, which has also prompted an increase in gasoline prices. 

Investors seeking a broader and more equal-weighted ETF may want to also consider the SPDR S&P Transportation ETF (XTN).  This fund contains 46 underlying holdings in the transportation sector with a similar portion of the total assets being distributed to each stock.  The top sub-industries include trucking, airlines, and air freight components. 

XTN charges an expense ratio of 0.35 percent and has gained over 10 percent so far this year. 

The biggest risk to a derailment of the transportation uptrend is a slowdown in consumer activity that necessitates a pullback in shipping and logistics demand.  However, the market seems squarely focused on economic expansion in the late stages of this bullish momentum. 

Further upside in transportation stocks will likely be fueled by additional positive manufacturing and corporate earnings data that lifts share prices for this key segment.