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Dissecting the Recent Correction in Transportation ETFs

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Dissecting the Recent Correction in Transportation ETFs PART 1 OF 4

Transportation Sector Edges Out the Broader Market Last Week

Transportation ETFs post gains 

The current earnings season has been an encouraging one for courier service providers, which, in turn, have benefitted the performance of the hard hit transportation sector. ETFs tracking the performance of the transportation sector in the US, namely the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN), rose over the last week, partially offsetting the steady decline shown in the year to date. Air freight and logistics service providers such as C.H. Robinson Worldwide (CHRW), United Parcel Services (UPS), Expeditors International of Washington (EXPD), and FedEx (FDX) were some of the largest gainers.

The iShares Transportation Average ETF seeks to replicate the performance of the Dow Jones Transportation Average Index. It comprises 20 stocks from industries such as railroads, shipping, air freight and courier services, trucking, and airlines. Over the week ending July 29, IYT rose 1.52%, in contrast to the broader US equities market as measured by the SPDR S&P 500 ETF Trust (SPY), which fell by 0.28% over the same period. At the same time, XTN, which includes a larger group of transportation stocks, rose 0.27%.

Transportation Sector Edges Out the Broader Market Last Week

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The sector was affected to the downside in the first half of 2015

After delivering stellar returns over the three years ending 2014—due to growth in volumes and favorable fuel costs—the sector underperformed both industrials and the broader market in 1H15. Its performance has been hit hard by factors such as the investor reaction to the profitability impact of unsold capacity in passenger airlines. Weak industrial production in the first half of 2015 also affected the performance of railroads and trucking operators.

Historically, the US transportation sector has shown a strong positive correlation with industrials (Dow Jones Industrials Index). But this relationship broke off during 1Q15 when the above-noted trends had a bigger impact on transportation service providers. As a result, the Dow Jones Transportation Average Index fell by 11.1% during 1H15, while industrials and the S&P 500 remained relatively flat over the first six months of this year.

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