Exchange-Traded Funds (ETFs) in the transportation sector are a smart addition to a broadly diversified portfolio. Investing in 2022 proved to be challenging, especially amid the stock market crash caused by uncertainty surrounding the global outbreak of the COVID-19 virus. Diversification is more important now than ever.
What are Transportation ETFs?
Transportation ETFs are funds that invest in the stocks of companies operating in the transportation sector. These companies may include those that move consumers or goods over land, air, or sea.
This sector includes shipping companies, freight companies, airlines, air cargo companies, railroads, delivery services, and logistics firms.
Why Invest in Transportation ETFs?
The main reason that may attract investors to transportation ETFs is that they provide a low-cost and diversified way to benefit from this industry. Strategically, it is believed that an investor may want to buy and hold transportation ETFs when the economy is strong and expanding, an environment in which demand for goods—and therefore their transport—also tends to grow.
Traditionally, when consumers buy more goods, there is greater demand for transporting and delivering those goods to consumers. This can benefit shipping companies and delivery services like FedEx (FDX) or United Parcel Service (UPS). As a simple example, imagine high demand for goods and millions of consumers ordering products for delivery from Amazon (AMZN), which in turn drives up demand for freight services like UPS and FedEx, increasing their revenues and profits.
As many Americans were sheltering in place and practicing social distancing during the early stages of the pandemic, demand for online shopping and delivery services surged in early 2020 while actual businesses and some other sectors of the economy were almost completely frozen due to imposed lockdowns. On the other hand, the transportation sector was also affected due to a lack of air travel and other public transport usage during the pandemic. Additionally, oil prices, supply chain issues, and inflation can impact the transportation sector.
If you want to bet on the transportation sector, you can start by investing in ETFs. Below are some funds to consider for your portfolio this year.
Best Transportation ETFs
When searching for the best transportation ETFs, we examined three key traits:
- Low expense ratios
- High relative AUM (Assets Under Management)
- A long track record showing that they reflect their underlying indexes
These metrics were reviewed against other transportation ETFs. When comparing these funds to each other, you may also want to consider performance history, especially over the long term, such as annualized returns over five or ten years.
We also excluded leveraged equity funds, which carry higher market risks than traditional ETFs.
Based on these traits, here are three of the best transportation ETFs to buy.
iShares U.S. Transportation ETF (IYT)
Although it is not the cheapest transportation ETF, IYT is the largest, with approximately $1.8 billion in assets under management as of January 12, 2022. With its long history since its establishment in 2003, it has a long performance record for analysis. The average annual total return since inception was 11% at the end of December 2021. IYT tracks the S&P Transportation Select Industry FMC Capped Index (USD). The expense ratio for IYT is 0.41%, or $4.10 for every $1,000 invested.
SPDR
S&P Transportation ETF (XTN)
This transportation fund tracks the S&P Transportation Select Industry Index. Its components include companies in the trucking, aviation, rail, maritime, air freight, and logistics sectors. Having more components does not necessarily mean higher returns, but diversification can reduce price volatility in the short term. Assets under management exceeded $850 million as of January 12, 2022. The expense ratio for XTN is 0.35% ($3.50 per $1,000 invested).
SPDR S&P Kensho Smart Mobility ETF (HAIL)
This transportation fund is unique because it invests in stocks of companies involved in smart mobility, which includes self-driving vehicle technology, ride-sharing companies, and drone products. Assets under management for HAIL surpassed $160 million as of January 12, 2022, and its expense ratio is 0.45% ($4.50 per $1,000 invested).
Conclusion
Investors who buy ETFs in specific sectors typically seek diversification in a particular area of the market, either to achieve a long-term goal or to take advantage of short-term trends. As with any fund with a narrow focus, wise investors should limit their exposure to any one sector to 5% to 10% of their portfolio assets.
Similarly, it is wise to include in your portfolio funds that invest in broader areas of the market, not just in sectors. For example, a diversified portfolio may consist of core assets investing in a broad index like the S&P 500 (stocks) and the Barclays Aggregate Bond Index (bonds), along with sector funds such as transportation ETFs as smaller allocation assets. For more information on best practices for diversification, see our article on how to build an investment portfolio.
Frequently Asked Questions (FAQs)
What are transportation ETFs?
Transportation ETFs are funds that invest in stocks of companies belonging to the transportation sector. This may include airlines, shipping companies, and transport firms.
What factors affect the transportation sector?
The transportation sector includes companies focused on delivering goods and providing public transportation among other things. Factors that can influence the sector include fluctuations in the delivery of goods purchased online to homes, oil and gas prices, and even supply chain issues, such as shipping goods internationally.
Source: https://www.thebalancemoney.com/best-transportation-etfs-4176186
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