Good Advice: Don't Buy Transportation ETFs Just Because It's Labor Day

Labor Day weekend is here and with it comes the one of the busiest travel and tourism weekends of the year. With that, it might seem like a good idea to write a story along the lines of “best ETFs for Labor Day travel” or for the traders left at their desks right now to gobble transportation stocks.

Historical data reveal the opposite is true. Simply put, if seasonal trends hold in 2015, buying exchange traded funds such as the iShares Transportation Average ETF IYT or the SPDR S&P Transportation ETF XTN just because Labor Day is here is not the best idea.

As it pertains to the Dow Jones Transportation Average Index, the underlying benchmark for the $778.3 million IYT, history says market participants should be long transports right now.

“Analysis has revealed that with a buy date of March 9 and a sell date of June 4, investors have benefited from a total return of 187.93% over the last 10 years. This scenario has shown positive results in 7 of those periods. Conversely, the best return over the maximum number of positive periods reveals a buy date of October 19 and a sell date of August 12, producing a total return over the same 10-year range of 121.25% with positive results in 10 of those periods,” according to Equity Clock. 

Click on that link to see just nasty things get for the Dow Jones Transportation Average in September and the early stages of October. It becomes clear that if that trend stays true to form in 2015, buying IYT or XTN today or next Tuesday could be an egregious error for traders.

In theory, the US Global Jets ETF JETS should be left out of this conversation because the ETF debuted in April, confirming the historical data is not there to see how this fund performs around and following Labor Day. Alas, there is plenty of historical data for the S&P Airlines Index, which has averaged a September loss of a third of a percent over the past 20 years. 

Two caveats regarding JETS. First, JETS tracks an in-house index, the U.S. Global Jets Index (JETSX), not the aforementioned S&P Airlines Index. Second, JETS is an ETF traders should keep on their watch lists in the coming weeks because the S&P Airlines Index usually notches its third- and second-best months of the year in October and November.

JETS deserves some credit. It has amassed nearly $43 million in assets under management in just over four months of trading while IYT and XTN have bled a combined $1.46 billion year-to-date.

The bottom line is ETFs work well for thematic stories, such as Labor Day travel, but financial markets do not give money away. The logic behind buying transportation stocks and ETFs simply because it is Labor Day is akin to believing consumer staples and healthcare stocks will always be market leaders because people have to eat and people always get sick. Markets simply do not work like that.