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TheStreet Open House

ETF Buffers Weaknesses in Transportation

Stocks in this article: IYT FSRFX FAA SEA LUV UNP

NEW YORK ( TheStreet) --Transportation remains an attractive market area as the global economy continues along the road to recovery. However, investors need to be cautious when seeking out a lucrative ways to invest in this industry. An interesting split is surfacing in the sector.

Companies in the rail and trucking industry appear promising while the airline and shipping subsectors appear certain to see some lag in coming weeks and months.

Given this separation, I would advise investors to avoid concentrated plays on specific aspects of transportation industry such as the Guggenheim Airline ETF (FAA) and the Guggenheim Shipping ETF (SEA).

Instead, broad-based products like the iShares Dow Jones Transportation Average Index Fund (IYT) and the Fidelity Select Transportation Fund (FSRX) , which balance transportation's strengths and weaknesses, are more apt for upward action looking towards the future.

In recent weeks, it has been hard to ignore the performance of the airline industry. Thanks to strong earnings reports coming from major players including Delta (DAL) , Southwest (LUV - Get Report) and the newly merged United Continental (UAL), FAA has managed to power skyward locking in all-time highs. Although this performance has been notable, based on the outlooks from industry representatives, the curtain may be closing on this rally.

This week, the head of the International Air Transport Association offered a less than optimistic prediction for the airline industry. Setting his sight towards the near future, the representative reported that the peak is likely over for the airlines and expects the industry's profits will swing significantly lower in 2011.

Meanwhile, oversupply issues threaten to strangle the upside potential for the shipping industry. In a report this week from Bloomberg, analysts noted that shipping rates for supertankers have faced a dramatic downturn as fleets expand faster than demand for oil. The drag is not expected to disappear any time soon. Rather, the majority of analysts from the industry foresee supertankers being unprofitable for at least two years.

While the near term prospects for the shipping and airline industry look poor, land-based transportation sectors appear to be showing some promising signs. Railroad companies such as Kansas City Southern (KSU) and Union Pacific (UNP - Get Report) have released optimistic earnings numbers.

Elsewhere, in the trucking industry, the American Trucking Association recently reported an increase in truck tonnage in September. Following this report, C.H. Robinson Worldwide (CHRW) released an analyst beating earnings report.

Because they are designed to track all aspects of the transportation industry, funds such as IYT and FSRFX are not immune to the weaknesses in airlines and shipping. They are, however, able to offset these weak points thanks to their heavier dedication to the promising aspects of the transportation industry.

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