As optimism rises for the COVID-19 pandemic to subside, a travel recovery is beginning to take shape across the United States. This is prompting some investors to consider getting behind airlines, cruise lines and other transportation-related stocks once again. One way to get in on the action is through exchange-traded funds (ETFs).
Transportation exchange-traded funds primarily invest in companies involved in travel services and the industries that support them. These companies include airlines, railroads, trucking and vehicle manufacturers.
Depending on the state of the economy, transportation companies can thrive as demand for travel, goods and services increases, although many of these companies have been deeply impacted by travel shutdowns caused by the coronavirus.
Through ETFs, investors get access to a basket of companies with a similar profile – in this case, transportation-related services. ETFs are convenient because they provide instant diversification at a low cost. This added benefit is appealing to all types of investors, especially when picking stocks requires a certain level of investment knowledge.
Top airline and transportation ETFs
Below are some of the most widely held airline and transportation ETFs on the market.
U.S. Global Jets ETF (JETS)
JETS invests in a wide range of airline companies, including aircraft manufacturers and airport operators. The fund, issued by US Global Investors, selects both domestic and international companies with varying degrees of market capitalization. This ETF is a pure-play on the airline industry.
Five-year returns (annualized): 3 percent (as of June 1, 2021)
Top holdings: American Airlines (AAL), United Airlines (UAL) and Southwest Airlines (LUV)
Expense ratio: 0.60 percent
Assets under management: ~$4 billion
iShares Transportation Average ETF (IYT)
IYT invests in U.S. airline, railroad and trucking companies. The fund tracks the performance of 20 transportation stocks that make up the S&P Transportation Select Industry FMC Capped Index.
Five-year returns (annualized): 16 percent (as of June 1, 2021)
Top holdings: Fedex (FDX), Kansas City Southern (KSU) and Alaska Air (ALK)
Expense ratio: 0.42 percent
Assets under management: ~$2 billion
First Trust Nasdaq Transportation ETF (FTXR)
FTXR invests in U.S. companies involved in airports and airlines, trucking and railroads. The fund tracks 30 transportation companies that are part of the Nasdaq US Smart Transportation Index. The fund launched in September 2016.
Three-year returns (annualized): 12 percent (as of June 1, 2021)
Top holdings: Expeditors International of Washington (EXPD), C.H. Robinson Worldwide (CHRW) and Westinghouse Air Brake Technologies (WAB)
Expense ratio: 0.60 percent
Assets under management: ~$1 billion
SPDR S&P Transportation ETF (XTN)
XTN has about a 40 percent allocation to airline and air freight companies, with the remainder invested in railroads, marine ports and services, as well as trucking. The fund from State Street Global Advisors tracks the performance of the S&P Transportation Select Industry Index.
Five-year returns (annualized): 17 percent (as of June 1, 2021)
Top holdings: United Parcel Service (UPS), Atlas Air Worldwide (AAWW) and JetBlue Airways (JBLU)
Expense ratio: 0.35 percent
Assets under management: ~700 million
ETFMG Travel Tech ETF (AWAY)
Although not a traditional transportation ETF, AWAY invests in technology-focused travel and tourism companies that benefit the travel industry. The fund tracks the performance of 30 companies involved in travel booking and reservations and ride-sharing applications, as well as travel advice. The fund launched in February 2020.
Three-year returns (annualized): N/A
Top holdings: Airbnb (ABNB), Uber Technologies (UBER) and Expedia Group (EXPE)
Expense ratio: 0.75 percent
Assets under management: ~350 million
How to invest in airline ETFs
Depending on your financial goals, asset allocation and risk tolerance, there are various strategies for investing in airline and transportation stocks. Your level of financial knowledge and engagement with your investments also plays a factor.
After you determine your comfort level and narrow your options, the key features to consider are:
- Fund performance: Numbers don’t lie. So while you do your research, take a look at a fund’s short-, mid- and long-term performance.
- Trading volume: The more liquid a fund is, the easier it will be to buy and sell. Look at how average trading volume compares to similar ETFs.
- ETF top holdings: By law, fund companies need to disclose their holdings, which is beneficial for investors as it provides transparency. It’s also helpful to decide whether those investments line up with your financial goals. When looking at holdings, pay attention to the portfolio weightings.
- Fund flows: Many investors track how much capital flows in and out of funds, often weekly and monthly. Any long-term trends in fund flows are valuable as they paint a picture of investors’ sentiment.
- Expense ratios and fees: By default, most ETF providers charge competitive fees. But even at relatively low levels, those fees can add up, so make sure to compare apples-to-apples and read the fine print.
- Assets under management (AUM): Many investors use this figure as a vote of confidence to assess other investors’ engagement with a particular ETF. Along with AUM figures, it might be helpful to check the longevity of the fund.
- Fund issuer: Brands are powerful, and that’s no different in the ETF space. Some investors feel comfortable only investing in large asset managers, while others see the value in newcomers. Decide what works for you and your financial needs.
Use the factors above as a guide to discovering your next transportation ETF.
While discretionary travel was on pause during the pandemic, the trend is set to resume in the months ahead as vaccination rates improve. As the tide turns, airline and transportation ETFs can be a gateway to riding any lift in the sector.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.