The FedEx Effect: How The Shipping Giant Impacts ETFs

Last week, logistics and shipping giant FedEx Corp. FDX, one of the biggest components in the Dow Jones Transportation Average, lowered its fiscal 2016 earnings per share guidance to $10.40 to $10.90 a share from a prior range of $10.60 to $11.10 per share. Shares of FedEx are off nearly four percent over the past week, a decline that has been a drag on some exchange traded funds.

The iShares Transportation Average ETF IYT has traded modestly higher over the past week, but the fund has tumbled in the days since FedEx's earnings up date. IYT, which follows the Dow Jones Transportation Average, features FedEx as its largest holding at a weight of 9.2 percent.

Regarding FedEx, “S&P Capital IQ Equity Analyst Jim Corridore thinks results were hurt by higher self-insurance and incentive compensation costs and currency impact. However, total revenue growth of 5% would have been even stronger if one excluded currency weakness and fuel surcharges, which were lower on lower oil prices. Corridore believes that demand for international and domestic express and ground shipping remains strong,” according to a new research note from S&P Capital IQ. 

The research firm has buy ratings on United Parcel Service Inc. UPS and Expeditors International of Washington EXPD. Those stocks combine for 11.5 percent of IYT's weight.

Investors can take a different approach to transportation stocks while mitigating single-stock risk with the equal-weight SPDR S&P Transportation ETF XTN. None of XTN's 50 holdings account for more than 2.5 percent of that ETF's weight and neither FedEx nor UPS are top 10 holdigs in that fund.

“Meanwhile, XTN has a 20% weighting in air freight & logistics, which is the third largest behind trucking (36%) and airlines (27%). Unlike IYT, XTN is equally weighted, so FDX and UPS were recently a combined 4.5% of assets. XTN has a lower 0.35% expense ratio, but also has favorable S&P Capital IQ STARS and Fair Value assessments,” said S&P Capital IQ.

IYT and XTN, each rated overweight by S&P Capital IQ, have returned an average of almost 6.4 percent over the past month with airline stocks doing a significant part of that heavy lifting. IYT and XTN have airlines weights of 19 percent and 25.1 percent, respectively. Seven of XTN's top 10 holdings are airlines stocks.

However, an “all in” bet on airlines has recently paid off better than traditional transportation ETFs as the US Global Jets ETF JETS has surged 10.5 percent over the past month. Making the recent moves higher by transportation ETFs, in particular JETS, is the fact that oil prices have rebounded somewhat with the United States Oil Fund USO surging nearly 20 percent over the past month. Fuel is the largest input cost for airlines.