Transportation ETFs: Good News Already Priced In?

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) 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) and Union Pacific (UNP) 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.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.