Buying Railroad ETFs On A Government Shutdown (IYT, XTN, UNP)

There was speculation that the transportation stocks, including the railroad companies, would be hurt by the government shutdown.

Looks like the speculators have been incorrect thus far, considering the iShares Dow Jones Transportation Average ETF IYT is down less than two percent from an all-time high.

The ETF is made up of 21 stocks with the heaviest concentration in the railroad sector. The top two holdings, Union Pacific UNP and Kansas City Southern KSU, are railroad companies and they make up 21 percent of the allocation. Delivery services accounts for 20 percent, trucking another 18 percent, and airlines make up 15 percent of the ETF.

The exposure to the railroad stocks is what makes IYT an attractive investment option. The sector is up 300 percent since the 2009 bottom and is currently trading less than four percent from a new all-time high. The recent pullback is a buying opportunity based on the further potential upside for the sector.

Today, the Association of American Railroads reported a 4.4 percent rise in U.S. rail traffic in September. More importantly the traffic, without coal and grain rose by 4.9 percent, the best increase since December 2012. Earlier this week, billionaire investor Wilbur Ross made a comment on CNBC that oil transported via rail is a boost to the railroad stocks.

As long as the economy continues to grow at a decent pace and the government does not make the situation much worse in the weeks ahead, it is fair to say that the railroad stocks should continue to outperform. The question is when to buy and what to buy.

One option is IYT due to its large exposure to the railroad stocks. Another option could be the SPDR S&P Transportation ETF XTN. However, only 15 percent of the ETF is invested in the railroad stocks and only one holding in the top ten is in the sector. Unfortunately with no pure play railroad ETF available, the best option would be IYT or an individual railroad stock.

As far as when to buy into the railroad sector, the timing is always difficult to decipher. However, long-term investors could look to begin building a position in IYT on the recent pullback from an all-time high.