The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK ( ETF Expert) -- In March of 2008, I talked about Warren Buffett's increasing financial interest in transportation companies like Burlington Northern Santa Fe (BNI). It served as a "lead-in" to the notion that the iShares DJ Transportation Index Fund (IYT) could tell you when the U.S. economy might heal.
Similarly, the folks at Morningstar recently mentioned that Buffett acquired the second largest railroad corporation outright in Feb. 2010; they also used the Oracle of Omaha's financial interest as a segue for a discussion on diversifying with Transportation ETFs.
I agree with Morningstar that it is better to utilize an exchange-traded fund that represents a key sector, rather than make a bet on an individual company. Even Buffett can shoot the wrong elephant.However, the valuation-oriented Morningstar seemed to ignore the possibility that Transportation ETFs are expensive. For example, IYT tracks the Dow Jones Transportation Index -- a benchmark that currently trades at an estimated 19x forward earnings. The Dow Industrials? Its Forward P/E is more attractively priced at 12.3. Granted, FedEx (FDX - Get Report) shares bounded higher March 18, 2011, after its CEO expressed confidence that it would beat current expectations for 2011. Yet it's also true that the company had earned 3% less than it had in its previous third quarter. And yes, rail firms like CSX Corporation (CSX - Get Report) and Union Pacific (UNP - Get Report) should both benefit from the worldwide demand for coal in power generation. Yet both of these companies may have ongoing liabilities vis-a-vis asbestos or hazardous spills. So how do you decide? In truth, if this market had been banking on valuations, large-caps would be kicking the "beetlejuice" out of small-caps. But they're not. In spite of an enormous premium paid for owning small company stocks over large company stocks, the "risk-on" investor community is still betting on small. Similarly, "transports" have had momentum over the last six months... much the same way that small-caps have enjoyed. That said, transports have been struggling a bit lately. Here are the year-to-date performance numbers for several Transportation ETFs: In truth, as long as an exchange-traded vehicle like IYT remains above its 200-day moving average, you can probably board the train. If IYT falls below this trendline due to additional "aftershocks" to the global economy, consider a speedy departure.