Transportation ETFs can be a smart addition to a broadly diversified portfolio. Investing in 2020 has become challenging, especially in light of the stock market crash propelled by uncertainty over the global coronavirus outbreak. Diversification is arguably more important now than at any time in recent history.
But first, it's smart to understand how transportation ETFs work—before you invest your money. Find out if transportation sector funds can be a good investment now, or for the long term.
- Transportation ETFs are funds that invest solely in companies within the transportation sector.
- These ETFs offer investors a low-cost, diversified way to gain exposure to this market and potentially benefit.
- Generally, the transportation sector is a good investment when the economy is strong and demand for goods is high.
- If you do invest in transportation EFTs, it's a good idea to keep this to no more than 5% to 10% of your portfolio so you can diversify.
What Are Transportation ETFs?
Transportation ETFs are exchange-traded funds that invest in stocks of companies in the transportation sector. These can include firms that transport consumers or goods by land, air, or sea.
This sector includes trucking companies, shipping companies, airlines and air freight companies, railroads, delivery services, and logistics companies.
Why Invest in Transportation ETFs?
The primary reason investors may be attracted to transportation ETFs is that they offer a low-cost, diversified means of gaining exposure to this industry. Strategically, it’s been believed that an investor may want to buy and hold transportation ETFs when the economy is healthy and expanding, an environment in which demand for goods, and thus the transportation of them, is also expanding.
In 2020, an economic crisis fueled by the pandemic has sent shares into a bear market. However, some transportation stocks, such as rail company Kansas City Southern (NYSE: KSU), generally have fared somewhat better than the overall stock market so far this year.
Traditionally, when consumers are buying more goods, there is also greater demand for transporting and delivering the goods to consumers. This may benefit trucking and delivery services like FedEx (NYSE: FDX) or United Parcel Service (NYSE:UPS). For a simple illustration, imagine high demand for goods, and millions of consumers buying products for delivery from Amazon (NASDAQ: AMZN), which in turn drives greater demand from transportation service providers like UPS and FedEx, which thus increases their revenue and profits.
Because many Americans were sheltering in place at home and practicing social distancing during the pandemic, demand for online shopping and delivery services surged in early 2020 while physical businesses and some other segments of the economy were nearly frozen by mandated shutdowns.
In addition to delivery demand, the price of transportation stocks is partially supported by current reduced costs associated with lower oil prices.
Best Transportation ETFs
When searching for the best transportation ETFs, we screened for three key qualities:
1. Low expense ratios
2. High relative assets under management (AUM)
3. Long-term track record that shows it’s mirroring its respective index
These measures are looked at relative to other transportation ETFs. When comparing these funds with each other, you also may want to look at performance history, especially over the longer term, such as five- or 10-year annualized returns.
We also eliminated leveraged equity funds, which carry more market risk than conventional ETFs.
With these qualities in mind, here are three of the best transportation ETFs to buy in 2020:
- iShares Transportation Average (IYT): While not the cheapest transportation ETF, IYT is the largest, with approximately $352.8 million in assets as of March 31. Also, with more than 15 years of history since its inception in 2003, IYT has a long track record of performance to analyze (average annualized total return since inception is 8.87% at the end of March). IYT tracks the Dow Jones Transportation Average Index. Expenses for IYT are 0.42%, or $42 for every $10,000 invested.
- S&P Transportation ETF (XTN): This transportation ETF tracks the S&P Transportation Select Industry Index, which includes 43 transportation stocks, making XTN more diversified than most transportation ETFs. More holdings does not necessarily translate into higher returns, but diversification can reduce short-term price volatility. Assets under management were $89.7 million as of March 31 and expenses for XTN were 0.35%.
- SPDR S&P Kensho Smart Mobility ETF (HAIL): This is a unique transportation ETF because it invests in stocks of companies involved in smart transportation, which includes driverless vehicle technology, ride-sharing companies, and drone products. Assets under management for HAIL are $4.6 million and its expense ratio is 0.45%.
The Bottom Line
Investors who buy ETF sector funds usually are looking to diversify into a particular area of the market, either to satisfy a long-term objective or to take advantage of short-term trends. As with any narrowly focused fund, investors are wise to limit their exposure to any one sector to 5% to 10% of portfolio assets.
Similarly, it's wise to include in your portfolio funds that invest in broader areas of the market, not just in sectors. For example, a diversified portfolio might consist of core holdings that invest in a broad index, such as the S&P 500 (stocks) and Barclays Aggregate Bond Index (bonds) and add sector funds like transportation ETFs as satellite holdings that receive smaller allocations.
For more information on best practices regarding diversification, see our article on how to build a portfolio.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.