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Riding on U.S. economic recovery and increasing investor sentiment, transportation stocks are leading the way higher as of late. Solid retail, manufacturing, and labor data act as major tailwinds to the broad growth, indicating strong demand for movement of goods across many economic sectors.
The optimism in the sector got a lift from the FedEx (FDX - Analyst Report) earnings beat last month. This bullishness continues as we head toward the end of the year despite a bunch of major companies reporting mixed results last week.
This is especially true as the iShares Dow Jones Transportation Average Fund (IYT - ETF report) has been on a roll, beating out the broad market fund (SPY) and broad industrial sector fund (XLI - ETF report) by wide margins. The ETF gained nearly 3% over the past five days and over 30% in the year-to-date time frame (read: Transport ETFs: Can the Surge Continue?).
Given this, it might be worth it to shed some light on this ETF and its holdings for those who seek to enter the space. Below, we highlight some of the key details regarding IYT, and how recent earnings have led to the run-up in fund’s price.
IYT in Focus
The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to its small basket of 21 securities. The fund has accumulated $578.5 million in AUM while seeing good trading volumes. It charges 45 bps in fees and expenses (see: all the Industrials ETFs here).
The product puts more than 67% of assets in the top 10 firms, suggesting heavy concentration and dominance of the top 10 holdings with respect to returns. From a sector perspective, the fund is tilted toward railroads at 29.34%, while delivery service sector makes up for nearly 20.30% share.
IYT has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a ‘Medium’ risk outlook, suggesting that the ETF will outperform over the next one year (read: Top Ranked Transportation ETF in Focus).
Transportation Earnings in Focus
The impressive run in IYT share price was brought up by record profits for Q3 at one of the largest railroads, Union Pacific (UNP - Analyst Report), amid weak coal shipments and disruptions caused by floods in Colorado. Earnings per share rose 13% year over year to $2.48 and were a penny ahead of the Zacks Consensus Estimate thanks to pricing and productivity gains.
Though revenues increased 4.3%, it marginally missed the Zacks Consensus Estimate. UNP also achieved its best-ever operating ratio (percentage of total revenue spent on running the business) of 64.8% in the quarter. UNP occupies the top position in the fund’s basket with 11.95% share (read: Guide to Transportation ETF Investing).
Apart from UNP, the ETF got a boost from another major railroad, Kansas City Southern (KSU - Analyst Report), which gained over 4% in the past two days. IYT allocates 10.18% of total assets in UNP, which takes the third spot in the basket.
Although the company’s earnings of $1.10 per share missed our estimate by a penny, earnings rose 16% from the year-ago quarter on improved shipments from cross-border business. Revenues were up 7.7% year over year and inched past our estimate by nearly $5 million.
Further, FedEx also contributed to IYT upside. The share price of the courier company has risen nearly 6% in the past five trading sessions. The firm occupies the second position in the basket and represents about 8.88% of IYT (read: Transport ETFs in Focus on FedEx Earnings Beat).
Investors should note that the transportation sector is often considered a barometer of broad economic health as it grows when U.S. economic activity picks up. Given this, along with many other major companies yet to be reported, the transport sector and the ETF are poised to rise in the coming months, and could be worth a closer look by investors.
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