What Is the Transportation Sector?

The Transportation Sector Explained in Less Than 5 Minutes

A woman waits for her flight.
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The transportation sector is an investing category comprising stocks of companies involved in the service of moving people or goods and supporting overall U.S. infrastructure. Any time you use public transportation, fly to a destination, or even ship products, you’re utilizing a service from a company in the transportation sector.

If you’re curious about the transportation sector, we’ll explain the main concepts you need to know before investing.

Definition and Examples of the Transportation Sector

Transportation stocks are shares in companies involved in transporting goods or people or supporting infrastructure construction or repairs. A few of the top companies in the transportation sector include CH Robinson (CHRW), FedEx (FDX), Radiant Logistics (RLGT), and UPS.

The Dow Jones Transportation Average (DJTA) is the oldest U.S. stock index and can be an indicator of when the transportation sector is rallying or  or faltering.

How the Transportation Sector Works 

The transportation sector is comprised of several types of companies within the transportation industry:

  • Air freight: Companies that provide shipping and logistics services requiring aircraft carriers.
  • Airlines and aviation services: This can include companies that service or manufacture airlines, air traffic control systems, heliports, and landing strips.
  • Marine transportation: Companies involved in transporting goods or people across waterways.
  • Highway and motor carriers: Companies involved in transporting goods or people across highways and roads. Public transportation companies would also be included in this subcategory.
  • Freight railways: Companies involved in transporting goods or people via railway.
  • Postal and shipping services: Companies that ship, transport, and deliver goods.
  • Transportation infrastructure: Companies that build, repair, maintain, and support infrastructure across the U.S.

Pros and Cons of Investing in the Transportation Sector

Pros
  • Easy to understand 

  • More predictable growth

Cons
  • Does not perform well during recessions

  • Performance is linked to oil markets

Pros Explained

  • Easy to understand: Investing in what you know is a solid strategy. Since transportation companies are often household names (UPS, FedEx, American Airlines, etc.) and their business purpose is simple to understand, you may feel more comfortable investing in transportation stocks.
  • More predictable growth: Transportation companies tend to perform cyclically, booming when the economy is hot and dropping when the economy dips. These cycles can help investors predict (but not guarantee) when stock prices will rise and fall.

Cons Explained

  • Does not perform well during recessions: Though the sector is cyclical, you won’t always be able to predict when a recession is about to hit. The transportation sector took a major hit during the 2020 recession, for example. The three-year average on the DJTA shows that during times of recession, this industry can see major declines.
  • Performance is linked to the oil market: Since many transportation vehicles are fueled by oil, rising oil prices can impact this sector.

What It Means for Individual Investors

Transporting people and goods is a major industry—and while the transportation sector might rise and fall cyclically, factors like the rise in online shopping may support the industry for many years to come. Since we rely on this sector heavily in our daily lives, investing in the transportation sector could be a stable investment over the long term, especially if you select more stable investment products like ETFs.

How To Invest in the Transportation Sector

You can invest in the transportation sector in a few ways: exchange-traded funds (ETF) such as the Vanguard Industrials ETF, index funds such as the S&P 500 Transportation Select Industry Index Fund, or by researching and investing in individual companies within the transportation sector. To invest in specific companies, you’ll need to work with an investment company or purchase stocks through trading platforms like TD Ameritrade or Fidelity.

Keep risks in mind whenever you invest. While stocks can produce higher returns, they’re often riskier and require more vetting and active involvement. ETFs and index funds are generally considered safer investment strategies for long-term investment growth but can yield smaller returns than individual stocks.

Key Takeaways

  • The transportation sector comprises companies involved in the service of moving goods and people and building and supporting the US infrastructure.
  • While the transportation sector is cyclical, it’s often a stable addition to a portfolio.
  • Companies in the transportation sector tend to perform well during times of economic growth and poorly during recessions.

Frequently Asked Questions (FAQs)

Why is the transportation industry cyclical?

When the economy recedes, people often have less money to travel or have goods shipped. This hurts the transportation industry and causes stocks to dip. During times of economic growth, we tend to spend more money and travel more often, causing a rise in transportation sector stocks. 

What does ITL stand for in the transportation industry?

ITL stands for international transport and logistics.

What is transportation infrastructure?

Transportation infrastructure is made up of roadways, waterways, airways, railways, terminals, ports, and pipelines. It plays an integral part in the way we travel, receive goods and products, and connect with one another. Transportation infrastructure is also important to overall economic growth and development.