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Investing in Transportation Stocks and ETFs

June 07, 2021 · 6 minute read

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Investing in Transportation Stocks and ETFs

Transportation stocks are publicly listed companies that carry raw materials, manufactured products or travelers to different locations. Airlines and railcars may immediately come to mind, but the transportation sector encompasses everything from logistics to airport operations.

Transportation is also unique in the stock market because it’s often used as a bellwether for the broader economy. So if prices of transportation shares are climbing higher, some people often interpret this as a sign of optimism in the market towards growth. The logic is that a booming economy will likely lead to more travel and delivery of goods.

There are two main ways to invest in the transportation sector: buying shares of individual public companies or exchange-traded funds (ETFs). Here’s a primer on the transportation sector and how to think about investing in them.

What to Know Before Investing in Transportation Stocks

The stock market is a discounting mechanism. In other words, it will “discount” or take into consideration all factors in the present and future when pricing shares.

That means investors with the view that the economy will expand in the future may purchase shares of transportation companies now. They’ll do this on the expectation that people will take vacations or shop for more things online–all reasons to utilize transportation companies. Even partaking in activities like home buying could cause more lumber getting shipped.

This also means that transportation companies are highly cyclical stocks–or closely tied to economic growth. Revenue and profits of companies in trucking and shipping tend to be dependent on healthy economic trends.

Recent Performance of Transportation Stocks

Take for instance, how transportation companies performed during the Covid-19 pandemic in 2020. As the economy effectively grinded to a halt due to quarantine measures, transportation shares hit multiyear lows.

However, in 2021, the Dow Jones Transportation Average surged for 13 weeks–the longest such streak since 1899–as expectations ramped up among investors that vaccinations and stimulus packages in the U.S. would be catalysts for a resurging economy.

Trade relations can also affect the performance of transportation stocks. A trade war between the U.S. and China started in 2018 when the two countries set tariffs on each other’s exports. That created business uncertainty that weighed on some transportation companies since they’re so tied to the manufacturing of goods that get shipped between China and the U.S.

The Dow Theory and Transportation Stocks

One of the most commonly watched indexes for the transportation sector is the Dow Jones Transportation Average. It’s actually the oldest U.S. stock index, first created in 1884. Its cousin–the Dow Jones Industrials Average–is better known but actually the second-oldest gauge in the U.S.

Another reason investors may monitor the Dow Jones Transportation Average closely is because of the “Dow Theory.” According to this theory, if industrials are doing well and producing many goods, transportation companies will likely also benefit next, carrying those same goods to different locations.

So if the Dow Jones Industrials Average is rallying, that’s interpreted by some investors as a buy signal for companies in the transportation average. Such a strategy is an example of using technical analysis to research stocks.

Important Data in Transportation Industry

Investors interested in transportation may benefit from monitoring data that shows trends in the industry.

For instance, in order to keep tabs on air travel in the U.S., one good source is the passenger throughput data from the Transportation Security Administration (TSA). This essentially tells you how many passengers were screened at TSA checkpoints on a given day.

For railroad business trends, the Association of American Railroads releases a traffic report each week on their website. Another index that can be helpful to track for shipping is the Baltic Dry Index (BDI), which measures changes in the cost of moving raw materials like coal, iron ore or grains by sea.

Different Types of Transportation Stocks

Yes, the transportation sector is pretty broad, which can create confusion. For instance, trucking companies are part of the sector, but auto manufacturers aren’t. That’s because they produce products like cars and are actually part of the consumer cyclical sector.

Similarly, cruise lines are part of the cyclical sector rather than the transportation sector, because they focus on travel—thus, the consumer. It may be helpful to know subsectors of the transportation industry.

Logistics Services Stocks

This is the behind-the-scenes work of transportation, like companies that fill orders or plan supply and demand. For example, warehousing and storage companies or companies who take care of logistical services like connecting road carriers with businesses that ship product parts.

Air and Express Delivery Services Stocks

These are companies that move products, goods, or people by air for quick delivery. Major airlines would fall under this category. So do many delivery services, because they ship some packages by plane and work to deliver items quickly.

Maritime Stocks

Businesses in the maritime subsector transport by water. For example, companies who transport grain, coal, steel products, and iron ore on boats. Or other companies who ship petroleum by boat internationally.

Trucking Stocks

These companies carry goods by roads. According to the American Trucking Associations , the trucking industry moved about 73% of all freight transported in the U.S. in 2019, equalling almost 12 billion tons in goods. Trucking was also a $792 billion industry that year.

Freight Rail Stocks

These companies move products, goods, or people via train. For example, some of the major railways ship things by train across state lines in different regions.

Pros and Cons of Transportation Investing

Pros of Transportation Stocks

You may have heard experienced investors spout the age-old wisdom, “Invest in what you know.” There’s something to be said for buying a stock when you understand the company, how the business works and how it makes money.

There’s a decent chance that you “know” a few transportation companies. Do you order packages? Do you fly back to your hometown every summer? While the intricacies of industries like finance and semiconductors may be tougher to understand, it’s more likely the operations of transportation companies are easier to grasp.

Investing in transportation companies also allows an investor to benefit from expanding growth in an economy. Take the earlier example of online buying into consideration. If Internet buying trends continue in the U.S., American logistics, trucking, air freight and railcar companies are more likely to reap the benefits.

Cons of Transportation Stocks

Unfortunately, because they’re so cyclical, transportation stocks don’t necessarily do as well during periods of anemic economic growth or a recession. During such times, industries that stay strong are typically ones that are essential, or so-called defensive sectors like healthcare, utilities, or consumer goods like cleaning products.

In the meantime, people are more likely to cut back on online shopping or postpone big vacations. Consumers aren’t the only ones who cut back. Companies might order less lumber or fewer auto parts, for example. In a recession, now those goods don’t need to be transported as much.

The other risk with transportation companies is that they’re highly sensitive to the oil market. Trucks use gasoline, trains use diesel, airlines use jet fuel. So if oil prices are soaring, that increases operational costs for transportation companies.

Transportation ETFs 101

If someone wants to invest in a sector like transportation, they may want to buy a transportation stock ETF. ETFs are baskets of assets like stocks or bonds packaged into a single share. Many ETFs follow a certain index. Because they give exposure to multiple stocks or bonds, ETFs give investors some automatic portfolio diversification–a reason why they’ve exploded in popularity.

Let’s say the stock of a trucking and logistics business drops a whopping 20% in one day for a reason specific to the company. If the transportation industry as a whole is actually fine, the sudden decline of one trucking and logistics company may not drag down the ETF’s price too much.

The downside of transportation ETFs is that these funds can be quite narrow. As mentioned, one of the most commonly used indices for the transportation industry is the Dow Jones Transportation Average. There are several ETFs that track this index.

However, the Dow Jones Transportation Average is actually composed of only 20 stocks, which is a small number when it comes to ETF components. That means every stock in the ETF will have a bigger impact on the fund as a whole. For contrast, ETFs that track the S&P 500 contain 500 stocks. Narrowness is also a common problem with thematic ETFs, which follow specific trends or niche industries.

The Takeaway

For an investor bullish on the economic prospects of a country, transportation stocks could be a way for them to bet on these expectations. On the flip side, those who are pessimistic about growth in the future may want to trim or sell off their holdings of airlines, truckers and shippers. A riskier bet would be to short sell or trade options that are bearish on transportation stocks and ETFs.

While transportation companies are a diverse group and can be a way for investors to wager on growth, it’s also important to remember that they’re highly cyclical. Transportation stocks are also very sensitive to oil prices–another risk factor for the sector.

Investors can buy single-name transportation companies, as well as transportation sector ETFs, on SoFi Invest®’s Active Investing platform. If an investor has an eye on a transportation stock or ETF but doesn’t have enough money to buy a whole share of one, that’s okay. They can buy a fraction of a stock—otherwise known as a fractional share—through SoFi’s Stock Bits offering.

Get started investing in fractional shares with SoFi today.


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