Market Overview

Trying Out A Transportation ETF

Trying Out A Transportation ETF

Amid rising fuel prices, transportation stocks and the related exchange traded funds are delivering tepid performances this year. Following Monday's 2.3 percent loss, the iShares Transportation Average ETF (NYSE: IYT), the largest transportation ETF, is saddled with a modest year-to-date loss.

The $875.65 million IYT tracks the Dow Jones Transportation Average Index, the most widely followed gauge of transportation equities.

What Happened

While transportation stocks are scuffling, some analysts see opportunity in select corners of the broader transports universe. CFRA Research has an Overweight rating on the industrial sector, which is home to transportation names.

“In 2018, the S&P 500 Industrials sector is projected to generate 20 percent earnings growth, yet the sector trades a slightly below-average P/E multiple of 17,” said CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth in a Monday note.

IYT, which turns 15 years old in October, holds 20 stocks.

Why It's Important

“CRFA Equity Analyst Jim Corridore thinks the disparity between expected EPS growth and valuation is likely to lead to outperformance for the Industrials sector in the second half of 2018 relative to the rest of the market,” said Rosenbluth.

Within the broader transportation space, CFRA is constructive on air freight and logistics providers and airlines. That's relevant to IYT investors because those are two of the five industry groups represented in the fund and the duo combine for over 47 percent of the ETF's weight.

FedEx Corp. (NYSE: FDX) and United Parcel Service Inc. (NYSE: UPS) are two of IYT's top five holdings.

“Corridore thinks recent efforts by the Trump administration to pressure the U.S. Postal Service to raise rates charged to Inc. (NASDAQ: AMZN) could be a boon for private sector carriers, which could see market share growth if rates the U.S. Postal Service charges to Amazon and other e-commerce companies are increased,” said Rosenbluth.

What's Next

Airlines are being hampered by high oil prices, but the group's net margins are on the rise. Lower effective tax rates are helping the industry as would any declines in fuel costs.

CFRA is bullish on several of IYT's airlines, including Delta Airlines Inc. (NYSE: DAL), which it rates Strong Buy. The research firm has an Overweight rating on IYT.

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