NEW YORK ( TheStreet) -- In February, the iShares Dow Jones US Transportation Index Fund ( IYT) had to be altered after it dropped Burlington Northern Santa Fe from its portfolio. The railroad's shares ceased trading following its purchase by Warren Buffett's Berkshire Hathaway ( BRK.A), leaving IYT with a 13% gap in its holdings that needed to be filled. But IYT's index, the Dow Jones Transportation Average, is light on airlines, which means the ETF was unable to fill that gap with rallying airline stocks. This has caused the ETF's performance to lag that of actively managed transportation mutual funds. >>Want More ETFs? Visit Our ETF Screener Page The Dow Jones Transportation Average replaced BNI with Kansas City Southern ( KSU). In response, KSU was added to IYT's portfolio and now accounts for 5% of the fund. In order to fill the remainder of the hole left by Buffett's railroad, a number of the fund's other holdings were adjusted. In the absence of BNI, FedEx ( FDX) now ranks as the fund's top constituent, making up close to 12% of the ETF -- one percentage point more than before. The largest weighting adjustment among IYT's top 10 holdings was Norfolk Southern ( NSC). The fund's current 7% allocation to NSC follows an increase of more than two percentage points. Aside from the addition of KSU, most of the changes to IYT were minor. Therefore, ETF investors should continue to see long-term, stable growth holding this fund. However, don't expect IYT to be the biggest gainer among all transports-focused securities. IYT has significantly underperformed other funds such as the Fidelity Select Transportation Fund (FSRFX) in the past year, and this also caused its long-term returns to slide below competitors. The lagging performance from the ETF can largely be attributed to the fund's lack of exposure to the airline industry. Year to date through March 2, IYT has managed to stay in the black, returning slightly more than 1%. Comparatively, FSRFX, over the same period has gained 8%. Although the two funds boast many of the same top holdings, including Union Pacific ( UPC), CSX ( CSX), and UPS ( UPS), the most notable difference is the mutual fund's large holdings of airlines. Strength within this subsector of the transportation industry is difficult to ignore. The Claymore/NYSE Arca Airline ETF ( FAA), which remains the only pure-play ETF on the airlines, has been on a tear in 2010, outperforming not only IYT but also FSRFX. Since the start of the year, the fund has climbed more than 10%.
The strong gains from the airline industry have not gone unnoticed by FSRFX's portfolio managers. Delta Air Lines ( DAL), Southwest Airlines ( LUV), Pinnacle Airlines ( PNCL) and Continental Airlines ( CAL) all appear in the fund's top 10 holdings and together account for more than 20% of the total portfolio. IYT, on the other hand, which passively tracks the airline-light Dow Jones Transportation Average Index, has less than 10% in this industry. IYT's composition and subsequent underperformance highlights an important characteristic of ETFs. These instruments, due to their investment strategy, are forced to replicate their underlying index. Had the fund been an actively managed instrument, there is a good chance that the gap left open by BNI's exit would have been filled by the successful airline industry. Although IYT will continue to provide investors with broad exposure to the transportation industry, investors need to be aware that, because of its rigid index, the fastest growing segments of the transports sector will not always be the most represented. Investors looking for more short-term pops should instead seek out an actively managed product that can reallocate assets. Be careful, however, as active management always leads to higher costs. In this case, FSRFX's 1.03% expense ratio is considerably higher than that of IYT, which charges 0.47%. -- Written by Don Dion in Williamstown, Mass.