FedEx casts spotlight on transportation ETF

The delivery service, which reports its earnings on Wednesday, accounts for 10% of the ETF's index.

By TheStreet Staff Jun 21, 2011 11:09AM

By Don Dion, TheStreet


Although much of the economic-related headlines and debate throughout this week will be focused on the comments made during Federal Reserve Chairman Ben Bernanke's press conference and the troubles facing the European Union, there are a handful of other stories investors will want to keep tabs on in the days ahead.


For instance, on Wednesday, the transportation sector will be interesting to watch as FedEx (FDX), the delivery services titan, steps up to the earnings plate.


ETF investors looking to target FedEx and the rest of the transportation industry during the week will want to turn to the iShares Dow Jones Transportation Average Index Fund (IYT).


Designed to reflect the performance of the well-known index for which it is named, IYT boasts exposure to a basket of 21 companies dedicated to moving people and goods by land, sea, and air. Major holdings include Union Pacific (UNP), C.H. Robinson Worldwide (CHRW), JP Hunt Transportation Services (JBHT), and Kansas City Southern (KSU).

FedEx is ranked as IYT's second largest position, accounting for close to 10% of its index. The firm, along with other members of the delivery industry like United Parcel Services (UPS) altogether represents 22% of IYT's assets. Other major sector slices include railroads (27%) and trucking (23%).


By heavily leaning its assets towards these defensive corners of the transports sector, investors can be ensured that over the long run IYT will perform in a relatively conservative manner. While companies hailing from more aggressive corners of the transports sector such as airlines and marine shipping can be found among its holdings, these companies together account for a considerably smaller chunk of the fund's portfolio. In total, these two subcomponents represent 16% of IYT's index.


The outlook for FedEx heading into Wednesday appears mixed. A recent UBS analyst report cast a favorable light over the company, noting that factors such as decreasing regulatory risks, reduced competition, and improved yields will bode well for the company looking ahead.


It is important to note, however, that the FedEx's outlook is not all positive. On the contrary, factors including the market's recent rough patch and rising energy prices could end up weighing on the firm's bottom line.


Additionally, as we have seen in recent quarters, FedEx has struggled to satisfy analyst estimates. In the event of another earnings miss, IYT could be store for a short-term shake up.


While FedEx's report on Wednesday will be sure to be of interest for transports-focused investors, the firm's performance and outlook for the future will also provide hints into the state of the broader global economy. As I noted in this week's 5 ETFs to Watch, shipping increases traditionally indicate that consumers and businesses are becoming more confident in the state of the economic recovery.

It may be tempting to gain exposure to IYT in order to get a jump on FedEx's earnings report. However this may not be the safest bet. Instead, I would urge investors to give the markets some time to digest the company's performance before diving in.


The transports have held up well throughout the market's soft spell and will be set to rise when the recovery gets back on track. Rather than using the fund as a way to take bets on FedEx's earnings performance, investors should turn to IYT as a long term bet on global prosperity.


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