Transportation ETFs for turbulent skies

A broad fund may be the best way to play a rocky period for the airline industry in 2011.

By TheStreet Staff Dec 16, 2010 4:19PM

Airline stocks © Christie & Cole/Corbis By Don Dion, TheStreet


Analysts and market commentators had their sights set on FedEx (FDX) this week as the delivery company and economic bellwether missed earnings expectations for the most recent three-month period. 


After an early dip, however, FedEx shares bounced back, rising more than 2% to $94.36 in afternoon trading. The report came just days after FedEx announced that Dec. 13 was its busiest day ever in terms of deliveries, when it reportedly carried 16 million packages.


Any good news from FedEx bodes well for transportation heading into the new year. However, investing in the industry may prove tricky in 2011. Ultimately, the best way investors can take a long-term approach to this sector is through a broadly focused ETF such as the iShares Dow Jones Transportation Average Index Fund (IYT).


IYT is a well-diversified product that provides investors with exposure to all facets of the transportation industry. The fund, however, is noticeably conservative, dedicating the largest sector slices of its index to industries including railroads, delivery services and trucking. Together, those three sectors account for 75% of the fund's total portfolio. More volatile regions of the transport industries, such as airlines, represent far smaller slices.

The fund has seen some impressive action recently and has managed to jump in our long- term momentum rankings.


The Fidelity Select Transportation Portfolio (FSRFX) is another promising endeavor for bullish investors with a desire for transportation exposure.


Like IYT, FSRFX is largely reliant on the performance of rail and other ground-based transportation companies. However, the fund sets aside a noticeably larger percentage of its index to airlines, with Delta (DAL), Southwest (LUV) and United Continental (UAL) among the mutual fund's top 10 holdings.

Over the past year, FSRFX's dedication to airlines has helped it outperform its ETF competitor. Year to date, FSRFX has gained nearly 40%, while IYT has jumped 25%.


Traditionally, given the advantage FSRFX has had, thanks to its airline exposure, I would advise aggressive, risk-tolerant investors to use an airline subsector fund in order to get more upside out transportation investments. A fund such as Guggenheim Airline ETF (FAA), for instance, is dedicated to tracking this industry and therefore tends to see more pronounced day-to-day swings.


However, when it comes to investing in transportation in the coming year, airlines do not look overwhelmingly promising. In fact, while they have recently seen some strength, the 2011 forecasts are already calling for turbulent skies.


This week, Giovanni Bisignani, the CEO of the International Air Transport Association, had a dour prediction for the airline industry. Pointing to fuel costs and macroeconomic issues including the sovereign debt issues facing Europe, Bisignani said the industry may see a combined 40% dip in profits as a whole in the next year.


The transportation industry has fared well in 2010 as markets around the world continued to recover. I foresee more healing, so 2011 may be another strong year for this slice of the market.


For now, however, I would advise investors to be cautious when taking to the skies. Instead, it would be more fruitful for the long term to take a broader approach to tracking this industry using products such as IYT and FSRFX.


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