Investing in Transportation Stocks and ETFs

Transportation stocks are publicly listed companies that carry raw materials, manufactured products, or travelers to different locations. Airlines and railcars may immediately come to mind, but the transportation sector encompasses everything from logistics to airport operations.

Transportation is also unique in the stock market because investors use the sector as a bellwether for the broader economy. The logic is that a booming economy will likely lead to more travel and delivery of goods. So if prices of transportation shares are climbing higher, some people often interpret this as a sign of optimism in the market toward growth. Two main ways to invest in the transportation sector are buying shares of individual public companies or exchange-traded funds (ETFs).

What to Know Before Investing in Transportation Stocks

The stock market is a discounting mechanism. In other words, it will “discount” or consider all present, publicly known information when pricing shares.

That means investors who believe the economy will expand in the future may purchase shares of transportation companies before the expansion shows up in economic indicators. They’ll do this on the expectation that people will take vacations or shop for more things online — all reasons to utilize transportation companies. Even partaking in activities like home buying could cause more lumber to get shipped.

This also means that transportation companies are highly cyclical stocks — or closely tied to economic growth. Revenue and profits of trucking and shipping companies tend to depend on healthy economic trends.

Investors who focus on specific industries, like transportation, utilize a strategy called sector investing.

The Dow Theory and Transportation Stocks

One of the most commonly watched indexes for the transportation sector is the Dow Jones Transportation Average. It’s actually the oldest U.S. stock index, first created in 1884. Another index — the Dow Jones Industrial Average (DJIA) — is better known, but it’s the second-oldest stock market index in the U.S.

Another reason investors may monitor the Dow Jones Transportation Average closely is because of the “Dow Theory.” According to this theory, if industrials are doing well and producing many goods, transportation companies will likely also benefit, carrying those same goods to different locations.

So if the Dow Jones Industrial Average is rallying, that’s interpreted by some investors as a buy signal for companies in the transportation average. Such a strategy is an example of using technical analysis to research stocks.

Important Data in Transportation Industry

Investors interested in transportation may benefit from monitoring data that shows trends in the industry.

For instance, to keep tabs on air travel in the U.S., one good source is the passenger volume data from the Transportation Security Administration (TSA). This data source essentially tells you how many passengers TSA screened on a given day.

For railroad business trends, the Association of American Railroads releases a weekly traffic report on its website. Another index that can be helpful to track for shipping is the Baltic Dry Index (BDI), which measures changes in the cost of moving raw materials like coal, iron ore, or grains.

Different Types of Transportation Stocks

Yes, the transportation sector is broad, which can create confusion. For instance, trucking companies are part of the sector, but auto manufacturers aren’t. That’s because they produce products like cars and are actually part of the consumer cyclical sector.

Similarly, cruise lines are part of the consumer cyclical sector rather than the transportation sector because they focus on travel — thus, the consumer. To better understand transportation stocks, knowing the subsectors of the transportation industry may be helpful.

Logistics Services Stocks

Logistics is the behind-the-scenes work of transportation, like companies that fill orders or plan supply and demand. For example, warehousing and storage companies or companies that provide logistical services, like connecting road carriers with businesses that ship product parts, are part of the transportation logistics subsector.

Air and Express Delivery Services Stocks

These companies move products, goods, or people by air for quick delivery. Major airlines would fall under this category. Additionally, many delivery services would be included in this subsector because they ship some packages by plane and work to deliver items quickly.

Maritime Stocks

Businesses in the maritime subsector transport commodities over water. For example, maritime companies transport grain, coal, oil, steel products, and iron ore on boats, often internationally.

Trucking Stocks

Trucking companies carry goods by road. According to the most recent available data from the American Trucking Associations, the trucking industry moved a majority of freight transported in the U.S. in 2023, equalling almost 11.18 billion tons in goods. Trucking was also a $987 billion industry in 2023.

Freight Rail Stocks

These companies move products and goods via railroads. For example, some major railways ship commodities by train across state lines in different regions of the United States.

Pros and Cons of Transportation Investing

As with investing in any sector, there are pros and cons to transportation investing.

Pros of Transportation Stocks

Experienced investors may spout the age-old wisdom, “Invest in what you know.” There’s something to be said for buying a stock when you understand the company, how it works and makes money.

There’s a decent chance that you “know” a few transportation companies. Do you order packages? Do you fly back to your hometown every summer? While the intricacies of industries like finance and semiconductors may be tougher to understand, it’s more likely the operations of transportation companies are easier to grasp.

Investing in transportation companies also allows an investor to benefit from an expanding economy. Take the earlier example of online buying into consideration. If Internet buying trends continue in the U.S., American logistics, trucking, air freight, and railcar companies are more likely to reap the benefits.

Cons of Transportation Stocks

Unfortunately, because they’re so cyclical, transportation stocks don’t necessarily do as well during periods of anemic economic growth or a recession. During such times, industries that stay strong are typically essential, or so-called defensive investments like health care, utilities, or consumer goods.

In the meantime, people are more likely to cut back on online shopping or postpone big vacations. Consumers aren’t the only ones who cut back. Companies might order less lumber or fewer auto parts, for example. In a recession, those goods don’t need to be transported as much.

The other risk with transportation companies is that they’re highly sensitive to the oil market. Trucks use gasoline, trains use diesel, and airlines use jet fuel. So if oil prices are soaring, that increases operational costs for transportation companies.

Recommended: Cyclical vs Non-Cyclical Stocks: Investing Around Economic Cycles

Transportation ETFs 101

If someone wants to invest in a sector like transportation, they may want to buy a transportation stock ETF. Exchange-traded funds (ETFs) are baskets of assets like stocks or bonds packaged into a single share. Many ETFs follow a specific index. Because they give exposure to multiple stocks, ETFs give investors some portfolio diversification — a reason why they’ve exploded in popularity. But it’s important to note that ETFs still can be concentrated in a specific industry, so diversification degrees may be limited.

Let’s say the stock of a trucking and logistics business drops a whopping 20% in one day for a reason specific to the company. If the transportation industry as a whole is actually fine, the sudden decline of one trucking and logistics company may not drag down the ETF’s price too much.

The downside of transportation ETFs is that these funds can be quite narrow. As mentioned, one of the most commonly used indices for the transportation industry is the Dow Jones Transportation Average. Several ETFs track this index.

However, the Dow Jones Transportation Average is actually composed of only 20 stocks, which is a small number when it comes to ETF components. That means every stock in the ETF may have a more of an impact on the fund as a whole. In contrast, ETFs that track the S&P 500 contain 500 stocks. Narrowness is also a common problem with thematic ETFs, which follow specific trends or niche industries.

The Takeaway

For an investor bullish on a country’s economic prospects, transportation stocks could be a way for them to bet on these expectations. On the flip side, those who are pessimistic about growth in the future may want to trim or sell off their holdings of airlines, truckers, and shippers.

While transportation companies are diverse and can be a way for investors to wager on growth, it’s also important to remember that they’re highly cyclical. Transportation stocks are also very sensitive to oil prices — another risk factor for the sector.

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