Best Transportation ETFs in 2018

What Are Transportation ETFs, Why Invest in Them and Which Ones Are Best?

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Transportation ETFs are exchange-traded funds that invest in stocks of companies in the transportation sector, which can include those that transport consumers or goods by land, air or sea. This may include trucking companies, shipping companies, railroads, delivery services, or logistics companies. 

Investors that buy sector funds are usually looking to diversify into a particular area of the market, either for a long-term objective or to take advantage of short-term trends.

Either way, it's smart to understand how transportation ETFs work before you invest your money.

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 getting exposure to the transportation industry. Strategically, an investor may want to buy and hold transportation ETFs when the economy is healthy and expanding, an environment where demand for goods, and thus the transportation of goods, is expanding.

When consumers are buying more goods, there is also greater demand for transporting and delivering these goods to the consumers. For example, 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 more products from Amazon (NASDAQ:AMZN), which in turn drives greater demand from UPS and FedEx, which thus increase revenues.

Best Transportation ETFs

When searching for the best transportation ETFs, you'll want to look for key qualities, such as low expense ratios, high relative assets under management, and long-term track record. When comparing them with each other, you may want to look at performance history, especially long term, such as 5- or 10-year annualized returns.

With these qualities in mind, and in no particular order, here are three of the best transportation ETFs to buy:

  • iShares Transportation Average (IYT): Although not the cheapest transportation ETF, IYT is the largest with approximately $870 million in assets. Also, with 15 years of history since inception, IYT has a long track record of performance to analyze (average annualized return since inception is 10.5 percent). IYT tracks the Dow Jones Transportation Average Index. Expenses for IYT are 0.43 percent, or $43 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. Expenses for XTN are 0.35 percent.
  • Invesco Shipping (SEA): Formerly known as Guggenheim Shipping, SEA tracks the Dow Jones Global Shipping Index, consists of 25 transportation stocks, 75 percent of which are non-U.S. stocks and 25 percent of which are U.S. stocks. International exposure has recently been a drag on performance compared to U.S. transportation stocks. However, the international exposure can provide diversification benefits for investors. SEA has about $66 million in assets under management, which is relatively low for an exchange-traded fund. Expenses for SEA 0.65 percent, which is on the high side for an exchange-traded fund.

    Bottom Line on Buying Transportation ETFs

    Investors should keep in mind that transportation stocks do not consistently outperform the broader industrial sector, nor do they consistently outperform the S&P 500 index. Early stages of economic recovery can be good opportunities to invest in transportation stocks but there are never guarantees of market outperformance for any sector at any given time.

    Also, there are other factors, such as labor costs and the price of oil (fuel), that can impact the price of transportation stocks. As with any concentrated fund, investors are wise to limit their exposure to any one sector to 5-10 percent of the portfolio assets. Similarly, it's wise invest in broader areas of the market, not just in sectors. For example a diversified portfolio might consist of a few funds that invest in a broad index, such  as the S&P 500 and Barclays Aggregate Bond Index, and two or three sector funds.

    For more information best practices with diversification, see our article on how to build a portfolio.

    Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.