Transportation ETFs can be a smart addition to a broadly diversified portfolio. Investing in 2022 has become challenging, especially in light of the stock market crash propelled by uncertainty over the global COVID-19 outbreak. Diversification is arguably more important now than at any time in recent history.
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.
Traditionally, when consumers are buying more goods, there is greater demand for transporting and delivering the goods to consumers. This may benefit trucking and delivery services such as FedEx (FDX) or United Parcel Service (UPS). For a simple illustration, imagine high demand for goods, and millions of consumers buying products for delivery from Amazon (AMZN), which in turn drives greater demand from transportation service providers such as UPS and FedEx, which increases their revenue and profits.
Because many Americans were sheltering in place at home and practicing social distancing during the early stages of 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. On the flip side, the transportation sector was also impacted because of the lack of air travel and other public transportation being used during the pandemic. Additionally, oil prices, supply chain, and inflation can impact the transportation sector.
If you're willing to bet on the transportation sector, you can start by investing in ETFs. Below are some to consider for your portfolio this year.
Best Transportation ETFs
When searching for the best transportation ETFs, we screened for three key qualities:
- Low expense ratios
- High relative assets under management (AUM)
- Long-term track records that show they're mirroring their respective indexes
These measures are looked at relative to other transportation ETFs. When comparing these funds with one another, 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.
iShares U.S. Transportation ETF (IYT)
While not the cheapest transportation ETF, IYT is the largest, with approximately $1.8 billion assets under management as of Jan. 12, 2022. With a long history since its inception in 2003, IYT has a long track record of performance to analyze. The average annualized total return since inception was 11% at the end of December 2021. IYT tracks the S&P Transportation Select Industry FMC Capped Index (USD). Expenses for IYT are 0.41%, or $4.10 for every $1,000 invested.
SPDR S&P Transportation ETF (XTN)
This transportation ETF tracks the S&P Transportation Select Industry Index. Its holdings include companies in the trucking, airlines, railroad, marine, and air freight and logistics sectors. More holdings do not necessarily translate into higher returns, but diversification can reduce short-term price volatility. Assets under management were over $850 million as of Jan. 12, 2022. The expense ratio for XTN is 0.35% ($3.50 for every $1,000 invested).
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 were over $160 million as of Jan. 12, 2022, and its expense ratio is 0.45% ($4.50 for every $1,000 invested).
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.
Frequently Asked Questions (FAQs)
What is a transportation ETF?
A transportation ETF is an exchange-traded fund that invests in the stocks of companies that are in the transportation sector. This may include airlines, trucking, and delivery companies.
What impacts the transportation sector?
The transportation sector includes companies that focus on delivering goods, providing public transportation, and more. Factors that can impact the sector include increases and decreases in at-home delivery of items purchased online, oil and gas prices, and even supply chain issues, such as with shipping items overseas.
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.