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.
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.
As with many industries, mutual funds provide a highly liquid and diversified way to play the sector. Here are four of the best-regarded funds specializing in transportation stocks. All figures current as of November 2018.
Fidelity Select Transportation Portfolio
The Fidelity Select Transportation Portfolio (FSRFX) is under the aegis of Fidelity Investments, a leading provider of professionally managed pooled investment funds for both individual and institutional clients. Established in 1986, the mutual fund is managed by Matthew Moulis, whose tenure dates back to 2012. This 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. The portfolio's net assets total $460.79 million.
Fidelity Select Transportation has generated a 10-year annualized return of 14.74% for investors (so a hypothetical $10,000 investment in 2008 would be worth $39,550 now). 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. Top sub-industry holdings within the fund include railroads (34.97% of the portfolio); air freight and logistics (25.5%); and airlines (23.12%). Specific stocks with heavy weightings include Union Pacific Corporation at 14.78%; United Parcel Service, Inc. at 10.97%; CSX Corporation at 10.34%; FedEx Corporation at 7%; and Delta Air Lines at 5.72%.
Fidelity Select Air Transportation Portfolio
Want an even more specialized transportation play? The Fidelity Select Air Transportation Portfolio (FSAIX) is another offering made 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 $298.21 million in investor assets.
The Fidelity Select Air Transportation Portfolio has generated a 10-year annualized return of 16.14%; a $10,000 investment in 2008 would be worth hypothetically $44,665 today). The expense ratio is 0.82%. 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. Top holdings within this sector-focused fund include airlines (42.23%), aerospace and defense (32.22%); and air freight and logistics (19.62%). Specific heavily weighted stocks include Delta Air Lines at 11.97%; United Technologies Corporation at 10.5%; Southwest Airlines at 10.41%; and United Parcel Service, Inc. at 9.92%.
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 – though the fund also may purchase American Depositary Receipts (ADRs) to gain exposure to foreign stocks – and may include derivatives such as futures contracts, options on securities and stock indexes. Fund managers also focus the fund's $28.72 million assets in companies with small-cap or mid-sized market capitalization.
The Rydex Transportation Fund has generated a 10-year annualized return of 10.04% for investors. The fund's expense ratio of 1.63% 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. Top holdings within the fund include Union Pacific Corporation at 5.36%; United Parcel Service, Inc. at 5.14%; CSX Corporation at 4.18%; and FedEx Corporation at 3.78%.
ICON Industrials Fund
The ICON Industrials Fund (ICTRX) was established in 1997 and has been managed by Rob Young and his investment strategy team since 2017. 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: Currently, 22.68% of the $12.77 million portfolio is in railroads; 13.32% is in air freight and logistics; and 23.12% is in construction machinery and trucking. 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 7.35%. The mutual fund's expense ratio of 1.69% is one of the highest in the sector. Investors are charged an up-front sales load of 5.75% when shares are purchased but do not incur a deferred sales charges upon redemption of shares. A minimum initial investment of $1,000 is required for nonqualified accounts. Its top holdings, all transportation-related, include Allison Transmission Holdings at 10.42%; PACCAR Inc. at 9.05%; Cummins Inc. at 8.82% United Parcel Service at 8.6%; and Kansas City Southern at 6.76%.
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.