ETFs For Planes, Trains, And Automobiles

by on December 28, 2011 | ETFs Mentioned:

As the number of exchange-traded funds continues to multiply, investors have the ability to achieve increasingly granular exposure to narrow segments of the global economy. This development has worked out quite nicely for investors who utilize a “core and explore” strategy that calls for the bulk of exposure to be held in broad, plain vanilla stock and bond funds with smaller weights assigned to more targeted asset sub-classes that are deemed to be potential sources of alpha. The innovation in the ETF industry has given investors tools for tapping into incredibly targeted corners of the market, ranging from producers of solid state drive technology to smartphone manufacturers to platinum miners.

It’s also created an opportunity to tap into the “transportation sector,” a term that can loosely be used to cover companies whose operations focus around moving people and things between places. Below, we profile a few ETFs covering everything from planes to trains to automobiles [for more ETF insights, sign up for the free ETFdb newsletter]:

Guggenheim Airline ETF (FAA)

FAA tracks the NYSE Arca Global Airline Index, which is designed to measure the performance of highly capitalized and liquid U.S. and international passenger airline companies. Although this corner of the market has performed poorly over the last few years, the industry does have the capability to produce big gains in relatively short periods of time when stocks are climbing. Airlines can post big gains when personal and business expenditures climb and traveling frequency increases, and these stocks can struggle when broader equity market encounter turbulence. 

FAA maintains a rather shallow, top-heavy portfolio consisting of only 21 securities with nearly 80% of its total assets lying in its top ten holdings. The fund allocates a significant portion of their assets to three major U.S. companies: United Continental Holdings Inc, Delta Air Lines Inc , and Southwest Airlines Co.. In terms of country breakdown, FAA is biased towards U.S. equities but does offer some exposure to Germany, Singapore and Japan.

Considering the airline industry’s inherent cyclicality, FAA might not be suitable for investors wishing to build a long-term portfolio.  This ETF could, however, be a useful tool for those with a shorter time horizon looking to tap into the airline industry.

Dow Jones Transportation Average Index Fund (IYT)

This ETF is designed to offer investors exposure to the transportation sector of the U.S. equity market, including airlines, industrial transportation companies and general industrial services companies. Although IYT is not a pure railroad ETF, it does invest in several railroad companies such as their top holding Union Pacific Corp, which is the largest public railroad company in North America.

Transportation companies are generally involved in getting people and goods from point A to point B. As such, when the economy is booming demand for these services is generally strong. When consumption slumps and spending dies down, there is less of a need to move goods across the country. Taking a closer look at the fund’s portfolio reveals that the majority of its assets are allocated to the railroad, delivery services and trucking sub-sectors of the transportation industry, which in total account for nearly three-quarters of the portfolio’s total assets. Some of IYT’s top holdings include two of the world’s largest delivery firms, FedEx and UPS, as well as the passenger airline company, Alaska Air Group, Inc..

It should be noted that earlier this year Global X filed details for a proposed Railroad ETF that would offer pure play exposure to this corner of the market (along with plans for a Cement ETF, Toll Road & Ports ETF, and Farmland & Timberland ETF).

Global X Auto ETF (VROM)

With its debut in 2011, Global X’s VROM is the second automotive ETF to hit the markets, offering investors exposure to companies from around the world that are engaged in the production of automobiles, automobile parts, tires and related activities. In comparison to CARZ, VROM maintains a relatively broader portfolio by including parts manufacturers whereas CARZ focuses more exclusively on car makers.

Although the two funds are very similar, VROM underlying portfolio casts a wider net over the auto industry with investments in 51 different securities of companies that derive greater than 50% of their revenues from this particular sector. In terms of country breakdown, the allocations are slightly tilted towards Japanese equities, followed by heavy weightings towards German and U.S stocks, which in total account for more than two-thirds of VROM’s total assets. Some of the fund’s top holdings include Japanese auto powerhouse Toyota Motor Corporation, U.S.-based Ford Motor Co, and German automaker Daimler,producer of the popular car brands Mercedes-Benz and Maybach.

What further distinguishes VROM from CARZ is that it offers investors exposure to smaller cap companies from the auto industry, potentially giving a more thorough cross-section of the industry and diversifying exposure away from mega caps. VROM is also the cheaper option of the two with an expense ratio that is 5 basis points lower than CARZ, making it an attractive alternative for investors wishing to establish a short-term tactical tilt towards the automotive sector.

Disclosure: No positions at time of writing.