Transports ETF Defies Surging Oil Prices

Dow theorists are probably overjoyed that the iShares Transportation Average ETF IYT touched a new 52-week high earlier Thursday.

A simple explanation of the Dow Theory is that moves in the Dow Jones Transportation Index can be used to confirm moves in the more widely followed Dow Jones Industrial Average.

On Thursday, that theory is working as the SPDR Dow Jones Industrial Average DIA joined IYT in the new 52-week high club. Over the past year, IYT has outperformed DIA by 150 basis points with the former getting a boost from high-flying railroad stocks, among others. Union Pacific UNP and Kansas City Southern KSU combine for over 22 percent of IYT's weight. Overall, railroad names are the largest sub-sector represented in the ETF at over 31 percent, according to iShares data.

Related: Bond ETN Pricing in More Abenomics

IYT's bullishness is made the all more impressive when considering the ETF has soared in the face of rising oil prices. Using the U.S. 12-Month Oil Fund USL as the comparative instrument because USL is less vulnerable to contango than the more heavily traded U.S. Oil Fund USO, investors see that USL is up 11.2 percent in the past year. USL holds a basket of near-month NYMEX oil futures contracts along with contracts for the following 11 months.

Even investors that insist on using USO as the barometer will find that IYT is not only surviving as oil prices rise, but the ETF is thriving. IYT has outperformed USO by 990 basis points in the past year. The implication there is that IYT's surge is surprising and it is given the exposure some of the ETF's non-railroad holdings have to rising oil prices.

An almost combined 15 percent of IYT is allocated to UPS UPS and FedEx FDX. Trucking firms and airlines combine for another 32 percent of the fund's weight, all of which have been at some point in their histories been vulnerable to high fuel costs. For airlines, jumps of five to 10 percent in oil futures can mean billions in lost profits.

Fuel hedges can help, but if oil prices reverse lower, airlines can be left holding the bag and its shareholders that feel the pain. There are no guarantees that will happen again this year as it did in the second quarter of 2012, but there is also no denying the fact that airline stocks have, in a break from past precedent, risen with oil.

It is just one day, but West Texas Intermediate Futures are higher by 1.7 percent Thursday. IYT is up. All of the ETF's largest airline holdings are in the green today, too. That group is comprised of Alaska Air ALK, Delta DAL, United Continental UAL, Southwest LUV and JetBlue JBLU. Those stocks combine for about 15 percent of IYT's weight.

History buffs, chartists and those thinking that IYT will eventually succumb to high oil prices should consider this nugget: From September 26, 2011 to February 20, 2012, USL surged 37.4 percent. Over the same, IYT gained 19 percent.

For more on ETFs, click here.