Investors have a number of different investment vehicles available to them, so parking their money is easy to do. It's just a matter of understanding which one(s) make the most sense. Take mutual funds, for instance. These vehicles provide a highly liquid and diversified way to invest, and they're also the most popular choice for investors. Mutual funds cover a wide variety of industries and different asset classes. They're also popular because they reduce risk and are often actively managed, which means their holdings and asset allocations are readjusted on a fairly consistent basis.
Some mutual funds concentrate on the transportation sector—a segment of the economy that focuses on companies that move goods and people. This sector also encompasses the infrastructure and equipment needed to do so. This article covers some of the basics of the sector as well as how the mutual fund industry invests in it. We also list four of the best-regarded funds specializing in transportation stocks. All figures current as of October 2019.
- Mutual funds are popular with investors because they are highly liquid and diversified, and cut down on risk
- Transportation is a sub-sector of the industrials market, and encompasses large, well-established companies.
- Fidelity's Select Transportation Portfolio and the Select Air Transportation Portfolio are heavily invested in U.S. equities, and focus on airlines, and air freight and logistics.
- The Rydex Transportation Fund provides investors with capital appreciation by investing assets in transportation equities.
- The ICON Industrials Fund is invested in aerospace and defense, building products, and railroads.
Transportation Sector: An Overview
The transportation industry is a sub-sector of the broad industrials market and includes companies operating airlines, trucking and railroad services. The majority of goods purchased by consumers and other businesses must travel from one location to another, making the transportation industry integral to an economic infrastructure.
Transportation stocks are considered cyclical, meaning company profits flow in line with the movement of the overall economy. When markets are performing well, cyclical equities such as transportation company stocks tend to generate returns for consumers. Similarly, a downturn in the broader market leads to declining returns for shareholders of transportation industry stocks.
A vast majority of the companies operating within the transportation sector are large and well-established, providing opportunities for investors to receive enhanced returns through consistent dividend payouts. Investors can utilize growth-oriented or value-oriented equities as a complement to other large cap and mid cap holdings, as both exist in abundance within the sector. While there are specific benefits made available to investors in the transportation industry, sector-focused investments are not without risk.
There are plenty of growth-oriented and value-oriented equities to choose from within the transportation sector.
The transportation industry is deeply affected by the fluctuating costs associated with fuel, interest rates, less-than-ideal weather, fuel surcharges and taxes, license and registration fees, and insurance premiums for required coverage.
Fidelity Select Transportation Portfolio
The Fidelity Select Transportation Portfolio (FSRFX) is under the aegis of Fidelity Investments, a provider of professionally managed pooled investment funds for both individual and institutional clients. Established in 1986, this mutual fund is managed by Matthew Moulis, whose tenure dates back to 2012. The fund seeks capital appreciation by investing a minimum of 80% of assets in the common stocks of companies primarily engaged in providing transportation services to the public or those with a focus on the design, manufacture, distribution, or sale of transportation equipment. Both domestic and foreign common stock holdings are included within the fund, and each issuer is screened using fundamental analysis to determine financial strength and industry position. As of Sept. 30, 2019, the portfolio's net assets total $395.94 million.
Fidelity Select Transportation has generated a 10-year annualized return of 15.19% for investors, so a hypothetical $10,000 investment in 2009 would be worth $41,117 as of Sept. 30, 2019. For the life of the fund, it has returned investors 12.31%. The fund operates with an expense ratio of 0.8%, which is slightly lower than the category average of 1.19% for transportation and industrial funds. Investors are not charged an up-front sales load upon purchase, nor is a deferred sales charge assessed at redemption. However, a minimum investment of $2,500 is required for IRAs.
The fund is invested heavily in domestic equities, with a small portion devoted to both international companies, and cash and other assets. The fund's top sub-industry holdings within the portfolio include:
- Railroads: 43.5%
- Air freight and logistics: 23.44%
- Airlines: 18.58%
According to the fund's prospectus, more than 72% is invested in its top 10 holdings. The top five holdings include Union Pacific Corporation, UPS, Norfolk Southern Corporation, CSX Corporation, and Southwest Airlines.
Fidelity Select Air Transportation Portfolio
Want an even more specialized transportation play? The Fidelity Select Air Transportation Portfolio (FSAIX) is another mutual fund available through Fidelity Investments, and is also managed by Matthew Moulis. Established in 1985, the fund seeks to provide investors with capital appreciation by investing a minimum of 80% of fund assets in the equity securities of companies operating in the regional, national, and international movement of passengers, mail, and freight by way of craft. Moulis and his investment team include domestic and foreign equity holdings in the mutual fund, and each is screened for financial stability and industry position by using fundamental analysis. The fund manages $285.23 million in investor assets.
The Fidelity Select Air Transportation Portfolio has generated a 10-year annualized return of 15.98%. As of Sept. 30, 2019, a $10,000 investment in 2009 would be worth hypothetically $44,022. The expense ratio is 0.81%. Investors are not charged an up-front or deferred sales load, but a minimum initial investment of $2,500 is required for qualified accounts like IRAs.
This sector-focused fund is heavily invested in the following:
- Airlines: 43.95%
- Aerospace and defense: 36.25%
- Air freight and logistics: 14.59%
This mutual fund is focused primarily on domestic equities, while roughly 10% of the fund is invested in international names, and cash and cash equivalents. The top five holdings of the fund are UPS, Delta Air Lines, Southwest Airlines, United Technologies, and TransDigm Group.
Rydex Transportation Fund
The Rydex Transportation Fund (RYTSX) is part of the Rydex family of mutual funds and was established in 1998. This sector-focused fund is managed by Michael Byrum and Ryan A. Harder. It seeks to provide investors with capital appreciation by substantially investing all of the fund assets in equity securities of companies that fall within the transportation category.
Holdings are focused on companies headquartered and operating within the United States, but the fund may also purchase American Depositary Receipts (ADRs) to gain exposure to foreign stocks. There's also a chance the fund may include derivatives such as futures contracts, options on securities and stock indexes. Fund managers also focus the fund's $10.3 million assets in companies with small cap or mid-sized market capitalization.
The Rydex Transportation Fund has generated a 10-year annualized return of 10.34% for investors. The fund's expense ratio of 1.71% is higher than similar sector-focused funds within the transportation category. Investors are assessed an up-front sales charge of 4.75% when shares are purchased, although no deferred sales charge is imposed on redemption. A minimum initial investment of $2,500 is required for nonqualified and qualified accounts, with a $1,000 required for group retirement plans.
The majority of this mutual fund is invested in:
- Road and rail: 31.73%
- Airlines: 18.71%
- Air freight and logistics: 16.78%
The fund's top five holdings include Union Pacific Corporation, UPS, CSX Corporation, General Motors, and Tesla.
ICON Industrials Fund
The ICON Industrials Fund (ICTRX) was established in 1997 and has been managed by Craig, Brian, and Scott Callahan. Using a quantitative methodology to identify securities that are underpriced relative to value, the fund seeks to provide investors with long-term capital appreciation by investing a minimum of 80% of its assets in companies that operate within the industrials sector.
While it possesses broader focus than transportation-specific mutual funds, it is heavily weighted towards the sector. With $11.94 million in assets, 29.39% of its portfolio is invested in aerospace and defense, while building products and railroads represent 16.92% and 16.33% of the fund's portfolio respectively. Common stock and preferred stock are utilized to create the investment mix within the mutual fund, and any size market capitalization is allowed.
The ICON Industrials Fund has generated a 10-year annualized return of 11.84%. The mutual fund's expense ratio of 1.50% is considered high. Investors are not charged an up-front sales load when shares are purchased and do not incur a deferred sales charges upon redemption of shares. A minimum initial investment of $1,000 is required for nonqualified accounts.
This mutual fund's top five holdings include Northrop Grumman Corporation, Lockheed Martin, Canadian Pacific Railway, Raytheon, and Kansas City Southern.
The Bottom Line
It is important for investors to utilize sector investments such as transportation equities as part of a comprehensive asset allocation strategy for long-term investing. Mutual funds provide a simple way for investors to gain access to the transportation industry while mitigating some of the risks associated with the sector.