(The opinions expressed are those of the author, a columnist
By John Wasik
CHICAGO, July 7 As North Americans hit the
highways, airports and rails for vacations this summer, it's not
hard to believe that some of the most robust stocks are in the
transportation industry - particularly in an improving economy.
Transportation stocks have proven to be long-haul winners and
essential cogs in any growth portfolio.
Transportation company performance is generally a bellwether
of an economy's health. When consumer and industrial demand is
rising, the greater the need to ship raw materials and finished
products from various points of the globe.
On the retail side, a combination of higher demand and the
conflict in Iraq ratcheted up U.S. gasoline prices to the
highest level in six years this past Fourth of July weekend,
according to the American Automobile Association. Despite the
higher prices, some 35 million Americans hit the road during the
holiday weekend for trips of 50 miles or more.
In the wake of the 2008 financial meltdown, transportation
as a sector has been a solid performer. The S&P Transportation
Select Industry Index has averaged an annualized
return of nearly 29 percent over the past half-decade through
July 4, according to S&P Dow Jones Indices. That trounces the
performance of the S&P 500 Index, which posted a 19
percent return over that period, by nearly 10 percentage points.
For the 12-month period that ended July 4, the
transportation index has been even stronger - up nearly 44
percent, compared with about 25 percent for the broad S&P 500
WHERE TO INVEST
The best way to capture returns from this vibrant sector is
through a passive index fund like the iShares Transportation
Average ETF, which holds transportation leaders
including Union Pacific Corp, FedEx Corp and
United Parcel Service Inc. The ETF has its largest
holdings in air freight, logistics and trucking.
The iShares fund is up 36 percent for the past 12 months
through July 4, compared with 24 percent for the S&P Industrials
index. The fund has averaged growth of nearly 23
percent a year for the past half-decade and charges 0.46 percent
in annual expenses.
A smaller though less-expensive and better-performing index
fund in this sector is the SPDR S&P Transportation ETF,
which charges 0.35 percent annually. It is up nearly 43 percent
for the 12 months through July 4. It holds a broader group of
transportation companies including Avis Budget Group Inc
, Delta Air Lines Inc and Con-way Inc.
This ETF has a higher stake in airlines and trucking than the
To understand the sector, you need to consider its separate
moving parts: logistics, shipping, trucking and rail. Airlines
are a big part of the retail side of the industry. And there are
companies including FedEx and UPS that straddle nearly every
mode of transportation.
All of these companies have one thing in common - when the
economy is growing, their business improves.
"The valuations of many logistics companies are likely to
expand on improved investor sentiment should signs emerge that
the U.S. and global economies are improving," said Jim
Corridore, head of industrial equity research for S&P Capital
IQ, in a recent commentary.
Although the U.S. GDP shrank by 3 percent in the first
quarter due to the awful winter in two-thirds of North America,
growth is expected to pick up through the rest of this year.
Most pundits predict the overall economy will expand about 2
percent this year. After a strong employment report last week,
analysts are even dallying with the idea of a 4 percent rise in
U.S. economic growth. The market has responded heartily to this
optimism, with the Dow Jones Industrials Index closing
above 17,000 last Thursday. The general mood of the market will
depend upon earnings growth, which many analysts predict could
reach into double digits in the second half of this year.
Yet don't assume that transportation is going to be a smooth
ride indefinitely. The sector is particularly sensitive to oil
and fuel prices. With the ongoing turmoil in Iraq - and
resulting spike in oil prices - it will be a good idea to keep a
close eye on this sector.
(Follow us @ReutersMoney or here;
editing by Beth Pinsker and Matthew Lewis)