Thursday’s ETF To Watch: iShares DJ Transportation Index Fund (IYT)

by on October 21, 2010 | ETFs Mentioned:

Although the American economy is still stuck in a low growth environment, transports have been surging ahead as of late. Rail and air freight firms have managed to grow their businesses thanks to booming demand in Asia and rising commodity prices around the globe. Just last week, major railroad company CSX reported that profits soared by 43% and reached a record for the Q3 period.  However, it remains to be seen how extensive these gains have been and if this trend will carry over into the rest of the transportation sector.

For investors concerned about the health of the transports, today looks to be a pivotal trading session. Both railroad giant Union Pacific and package delivery firm UPS will report earnings before the bell, giving investors plenty to digest before the market opens. Union Pacific will seek to match the solid gains posted by fellow railroad operator CSX and hopes to show investors that it too has rebounded from the demand slump. UNP is projected to post earnings of $1.5 a share, which would be a substantial increase from the year-ago period in which the company delivered earnings of $1.02. Additionally, analysts are looking for revenues to surge by close to $700 million when compared to the prior third quarter period [see Who Else Wants A Railroad ETF?].

Meanwhile, UPS is projected to earn 88 cents a share, up from 55 cents in the same quarter last year. Analysts are also looking for the company to report revenues close to 11% higher than last year’s third quarter. “With its largest investment spend behind it, we look for UPS to harvest cash flow and reward investors,” wrote Sterne Agee, analyst Jeff Kauffman in a note to clients ahead of UPS’s report. “The combination of reduced capital requirements, increasing margins and a more flexible attitude about balance sheet management should result in increased dividends, share repurchases and acquisitions to augment share price.” [see ETF Plays On Planes, Trains, And Automobiles]

Due to these earnings reports, the iShares Dow Jones Transportation Average Index Fund (IYT) should be active in Thursday trading. In addition to large holdings to Union Pacific (9.9%) and UPS (8.1%), the fund offers investors exposure to 19 other transportation companies including FedEx, CH Robinson, and Norfolk Southern. In terms of market capitalization levels, the fund is heavily weighted towards large firms with close to 60% of the fund going towards large and giant cap companies. Over the past 13 weeks, the fund has jumped higher by 12.9%, and if today’s earnings reports live up to expectations, investors could see this figure surge much higher [also read How To Use ETFs To Invest Like Warren Buffett].

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Disclosure: No positions at time of writing.