ETF Plays On Planes, Trains, And Automobiles

by on July 30, 2010 | ETFs Mentioned:

As July draws to a close, a glance around the investing landscape carries an eerie similarity to a Yosemite campground littered with discarded food; there are bears everywhere. Unemployment remains elevated, and more and more investors are coming to accept that a meaningful recovery won’t progress until signs of job creation materialize. After implementing aggressive stimulus campaigns that have (for the most part) been successful, the governments of the world are looking to pass the baton to consumers. Unfortunately, they might not be ready to take the handoff [see Looking For Consumers? Follow The Millionaires].

But there are also a number of investors that maintain rosier outlooks and view the current environment as an opportunity to snatch up assets that have been pummeled by risk aversion but are also positioned to rally if the economy continues to recover. Warren Buffett famously described his acquisition of railroad operator Burlington Northern as an “all-in wager on the economic future of the United States.” The Oracle of Omaha added “I love these bets.” [also see How To Use ETFs To Invest Like Warren Buffett]

Some investors with bullish outlooks are content to maintain broad-based equity exposure, reasoning that a rally will lift all sectors of the market and preferring to maintain the benefits of diversification. Others seek out more targeted, high-beta exposures that tend to exhibit more volatility on both the up-side and down-side.

That’s precisely what Buffett did through his acquisition of BNSF. Railroads often trade as leveraged plays on the broader economy. During booms, demand for rail services surges, as manufacturers need to bring in raw materials and ship out finished goods to consumers and retail locations. But when the economy pulls back, demand for transportation services can slump, as evidenced by the most recent recession. If the economy gains strength businesses need to move their products, and there are only so many options for getting products quickly and cheaply from point A to point B [see ETF Plays To Invest Like Buffett, Fisher, Paulson].

Below, we profile three ETFs that offer exposure to sectors of the domestic global economy that could thrive if consumer spending and manufacturing picks up, or could take a nosedive if more hurdles pop up on the path to recovery [for more ETF ideas, sign up for our free ETF newsletter]:

  • Claymore Shipping ETF (SEA): This ETF tracks the performance of the Delta Global Shipping Index, a benchmark comprised of companies that derive a significant portion of their revenues from the seaborne transport of dry bulk goods and the leasing and/or operating of tanker ships, container ships, specialty chemical ships and ships that transport liquid natural gas. One word of warning on SEA: Greece makes up the second largest country allocation at about 16% of fund assets [see a breakdown of SEA holdings].
  • Claymore/NYSE Global Airline ETF (FAA): This ETF tracks the NYSE/Arca Global Airline Index, a a modified equal-dollar weighted benchmark that invests in airline stocks. FAA’s focus is on passenger airline firms, so its performance won’t necessarily depend as heavily on demand for transportation of goods. Still, FAA figures to trade as a leveraged play on the global economy, since demand for air travel falls into the discretionary spending category [see Clear Skies For Airline ETF].
  • iShares Dow Jones Transportation Index Fund (IYT): There’s no ETF offering pure play exposure to the railroad industry, but IYT is the closest thing out there [also read Who Else Wants A Railroad ETF?]. This fund tracks an index comprised of railroad companies, trucking firms, and shipping providers. A look at the underlying holdings highlights the diversity of exposure; FedEx (11.7%), Union Pacific (8.9%), and CH Robinson (7.2%) all receive big weightings. Whereas SEA focuses on companies that transport goods internationally, IYT’s holdings consist primarily on firms that transport goods within North America, perhaps making it more of a targeted play on the U.S. economy.

Disclosure: No positions at time of writing.