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The transportation industry has long been a key player in the American economy. The industry also occupies an important niche in the world market and involves the movement of freight and passengers through different modes such as rail, trucks, ship, and air.
The industry is highly competitive, capital intensive, and depends largely on the global demand for exports and imports. Furthermore, this industry has a direct correlation with the retail and manufacturing sectors.
So far, 2013 has proven to be a good year for the transportation industry. Thanks mainly goes to transportation companies in North America which have a broadly stable outlook, despite sluggishness in the U.S. and global economies (see: Transport ETFs: Can the Surge Continue?).
As the U.S. economy continues to recover, the sun will shine for the transportation industry. Further, the slow but steadily recover in the manufacturing and retail markets will also benefit the sector.
At a time when markets are on a high, transportation ETFs represent a good investment opportunity. This is why they are often considered to be a barometer of broad economic health, as they indicate that more goods are being moved around, and business activity is gaining strength (Read: Guide to Transportation ETF Investing).
Moreover, positives from the transportation industry were absorbed early by investors this year. Almost all the funds in the space have given strong returns with double-digit YTD gains not uncommon.
One shouldn’t miss this opportunity as this space has more to offer. For investors who wish to capitalize on the current opportunity we have the iShares Dow Jones Transportation Average Fund (IYT), which is Zacks ETF Rank #1 (Strong Buy) fund with a medium risk outlook.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely, Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the U.S. transportation market, we have taken a closer look at IYT below:
iShares Dow Jones Transportation Average Fund (IYT)
Launched in October 2003, IYT represents the most popular way to track the transport sector. The fund tracks the Dow Jones Transportation Average Index.
Volume and AUM are both impressive, ensuring that the product has tight bid ask spreads for virtually all investors. Despite this, the product does have a relatively high expense ratio, coming in at 46 basis points a year (See all the Industrials ETFs).
The fund manages an asset base of $590.7 million and trades at volume levels of more than 516,000 shares a day. This asset base is invested in a small basket of 21 securities.
The ETF is heavily exposed to the railroad industry as this segment makes up nearly 30% of the portfolio. Delivery services, trucking and airlines also get double-digit allocation in the fund with a share of 19.46%, 18% and 14.25%, respectively.
Top holdings include railroad operator Union Pacific at roughly 13.07% of assets while Kansas City Southern and FedEx take the next two spots making up nearly 16.7% of the total assets between them (see 3 Hot Sector ETFs Surging to #1 Ranks).
The fund has delivered an impressive year-to-date return of 16% and gives a decent yield of 0.94% annually. And with positive trends in both the domestic and global markets, this cyclical play could again lead the way higher as we close out 2013.
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