Investing in Planes, Trains, and Ships

Airlines are getting a lot of media attention these days, as high energy costs and much-criticized customer service have left them between a rock and a hard place. But in the transportation sector, they play a relatively small role -- and many other transports have been doing quite well.

Investors looking for a pure transportation play can choose the iShares Dow Jones Transportation Average ETF (NYSE: IYT  ) . Although components like Southwest Airlines (NYSE: LUV  ) haven’t gotten much love from Wall Street lately, railroad stocks, which make up more than a third of the iShares fund, can keep chugging along even when oil reaches historic highs. The ability to weather and even benefit from high energy and surging imports makes this fund one worth looking at.

Fund facts

  • Inception date: Oct. 6, 2003
  • Expense ratio: 0.48%
  • Net assets: $745 million

Fund specifics
The iShares fund tracks the oldest U.S. benchmark, the Dow Jones Transportation Average, created by Charles Dow in 1884. Back then the average mostly consisted of railroad companies, and rails still figure prominently today in the 20 U.S. transportation stocks.

The top two components are Union Pacific (NYSE: UNP  ) and Burlington Northern (NYSE: BNI  ) . Shipping and packaging companies are close behind: FedEx (NYSE: FDX  ) , Overseas Shipholding Group (NYSE: OSG  ) , and United Parcel Service (NYSE: UPS  ) . 

Continued high energy prices could unhinge global economies and reduce transportation demand. The markets have assumed that economic deceleration has made only a brief stop at the station, but that belief may be misplaced. Irrationally exuberant pricing in the oil patch and supply shortages may yet stifle economic activity, and that would be very bad for transportation stocks.

In addition, trucking stocks make up nearly 20% of the fund. High energy prices can put a lead weight on these companies and drag fund returns down.

Portfolio fit?
Because they are so important for transporting low-cost domestic coal, railroads are one of the few industries that benefit from rising energy prices. Railroads also carry both imports and exports, so they are more insulated than most industries from currency fluctuations and global trade flows.

Meanwhile, shipping companies have seen their shares rise as expectations for strong global demand continue. Unless the U.S. economy falls off the track, economic expansion should help support transportation stocks. 

Although an investment in transportation may not be the gusher that energy stocks have been, an investor with a long-term outlook may benefit from the fundamentals that support the companies in this sector.

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Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any funds or securities mentioned in this article. United Parcel Service is a Motley Fool Income Investor pick. FedEx is a Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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