Transportation ETF defies surging oil prices

Railroad stocks have been flying high and even airline stocks have gained altitude.

By Benzinga Jul 19, 2013 12:45PM
dmond Van Hoorick, Photodisc, Getty ImagesBy The ETF Professor

Dow theorists are probably overjoyed that the iShares Transportation Average ETF (IYT) touched a new 52-week high earlier Thursday.

A simple explanation of the Dow Theory is that moves in the Dow Jones Transportation Index can be used to confirm moves in the more widely followed Dow Jones Industrial Average.

On Thursday, that theory was working as the SPDR Dow Jones Industrial Average (DIA) joined IYT in the new 52-week high club. 

Over the past year, IYT has outperformed DIA by 150 basis points with the former getting a boost from high-flying railroad stocks, among others. Union Pacific (UNP) and Kansas City Southern (KSU) combine for over 22% of IYT's weight. 

Overall, railroads are the largest sub-sector represented in the ETF at over 31%, according to iShares data.

IYT's bullishness is all the more impressive considering the ETF has soared in the face of rising oil prices. Using the U.S. 12-Month Oil Fund (USL) as the comparative instrument because USL is less vulnerable to contango than the more heavily traded U.S. Oil Fund (USO), investors see that USL is up 11.2 percent in the past year. USL holds a basket of near-month NYMEX oil futures contracts along with contracts for the following 11 months.

Even investors that insist on using USO as the barometer will find that IYT is not only surviving as oil prices rise, but the ETF is thriving. IYT has outperformed USO by 990 basis points in the past year. The implication there is that IYT's surge is surprising and it is given the exposure some of the ETF's non-railroad holdings have to rising oil prices.

An almost combined 15% of IYT is allocated to UPS (UPS) and FedEx (FDX). Trucking firms and airlines combine for another 32% of the fund's weight, all of which have at some point in their histories been vulnerable to high fuel costs. For airlines, jumps of 5% to 10% in oil futures can mean billions in lost profits (Benzinga).

Fuel hedges can help, but if oil prices reverse lower, airlines can be left holding the bag ( and it's shareholders that feel the pain. There are no guarantees that will happen again this year as it did in the second quarter of 2012, but there is also no denying the fact that airline stocks have, in a break from past precedent, risen with oil.

It is just one day, but West Texas Intermediate Futures are higher by 1.7% Thursday. IYT is up. All of the ETF's largest airline holdings are in the green, too. That group is comprised of Alaska Air (ALK), Delta (DAL), United Continental (UAL), Southwest (LUV) and JetBlue (JBLU). Those stocks combine for about 15% of IYT's weight.

History buffs, chartists and those thinking that IYT will eventually succumb to high oil prices should consider this nugget: From Sept. 26, 2011 to Feb. 20, 2012, USL surged 37.4%. Over the same, IYT gained 19%.

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