NEW YORK ( TheStreet) -- I'm cautiously optimistic that gains are more likely in the near future for the iShares Dow Jones Transportation Average Index Fund ( IYT) and other popular transportation products.Since the start of May, IYT has been stuck in a downward trend, leaving some investors with reason for alarm. According to Dow Theory, a decline below February's low would confirm the Dow's decline below February's low (at the start of July) and signal a resumption of the bear market. The recent lag in IYT, however, can largely be attributed to weak performance from top holding FedEx ( FDX), which represents 10% of the fund's total portfolio. Over the past three months, shares of the shipping goliath have fallen over 17%, causing it to carve out new 2010 lows. The recent dismal performance is in large part due to the company's poor first-quarter earnings report and negative guidance. FedEx continued to pull the transportation ETF to the downside Wednesday, as shares of FDX slipped 2.5%, but IYT fell only 1.6% and Claymore/Arca Airlines ETF ( FAA) slid just 1.9%. Still, FedEx's poor second-quarter performance is not a bellwether for other major players in the transportation industry. According to a report from Barclay's, the headwinds that face FedEx are not based on the global economy. Rather, FedEx's poor quarterly earnings report was attributed to company-specific costs including the reinstatement of employee perks, including pension and medical benefits. Fellow shipping giant UPS is scheduled to report its second-quarter earnings before today's bell and it does not appear the firm is destined to deliver a FedEx-like disappointment. On the contrary, the company's prospects appear promising. Earnings estimates for the previous quarter and the fiscal year have been consistently rising over the past three months. A strong report from UPS would add to an already positive season for the transportation industry. In recent weeks, companies including CSX, Delta Airlines ( DAL), and US Airways ( LCC) have stepped up to the plate and announced an analyst beating performance. Delta's numbers were particularly optimistic, with the firm turning out its best quarter in a decade. I feel that strong earnings performance from these firms and others in the near future will be a far stronger driver for IYT in the near future than the weakness in FedEx.
Aside from UPS, Continental Airlines ( CAL), and Union Pacific ( UNP) are scheduled to report their quarterly results on Thursday. Southwest Airlines ( LUV) is scheduled to release its own numbers late next week. Optimistic reports from these firms should provide IYT with enough fuel to propel it higher. The prospects for the broad transportation industry appear optimistic. There are, however, a number of options for investors to consider when looking for ways to play the industry. IYT provides investors with ample exposure to the companies responsible for moving consumers and goods from point A to point B. However for some, its heavy exposure to the rail industry may make it too conservative. Investors looking for more pop may want to focus on a subsector transportation ETF such as Claymore/Arca Airlines ETF ( FAA). It is important to keep in mind, however, that a concentrated product like FAA will be more volatile than IYT. Exposure to FAA and other subsector ETFs should be kept small and watched closely. Investors wary of ETFs should turn to the Fidelity Select Transportation Fund ( FSRFX). With an active manager, this traditional mutual fund option will be able to adapt to shifting trends in the transportation industry. I've previously recommended it because the airlines have been performing better and FSRFX has greater exposure to airlines. It also has far less in FedEx, less than 2% at the end of May according to Fidelity. FSRFX has made up for its higher fee with better performance, but there is a 1% short-term trading fee if investors hold the shares for fewer than 30 days. -- Written by Don Dion in Williamstown, Mass.
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