Understanding the Transportation Sector: Investment Opportunities

What Is the Transportation Sector?

The transportation sector includes companies and infrastructure that move people or goods: airlines, railroads, trucking, marine transport, and air freight/logistics (a GICS industrials group).

It's closely tied to economic activity and can be sensitive to fuel costs and regulation, and investors can access it through stocks, ETFs, or mutual funds, with the Dow Jones Transportation Average often used as a performance gauge.

Key Influences on the Transportation Sector

The performance of companies in the transportation industry is highly sensitive to fluctuations in company earnings and the price of transportation services. Main factors affecting company earnings include fuel costs, labor costs, demand for services, geopolitical events, and government regulation. Many of these factors are interconnected. For example, if the U.S. government passes regulations that make it more difficult for people to earn their commercial drivers' license, this will reduce the supply of drivers, driving up the cost of hiring drivers.

Oil prices are a key factor for transportation, as the commodity’s price generally has an influence on transportation expenses. Gas and fuel prices that rise will increase costs for a trucking company, eating into their profit and potentially reducing their stock price.

Energy costs and the value of transportation stocks are certainly interrelated. Low energy costs may become a factor in boosting the share price of various transportation companies, but the influence can also be reversed. When demand for transportation services is high the impact will be reflected in quarterly reports of transportation companies. This information may, once disseminated, may motivate energy traders to bid up prices for oil and similar commodities. However, if demand for commercial transportation falls, this information could lead to a decline in oil prices as well.

How to Invest in Transportation: Stocks, Mutual Funds, and ETFs

You can invest in companies that move people and products by buying shares of individual transportation companies, or through sector-specific mutual funds or exchange-traded funds (ETFs) that specialize in the transportation sector. The transportation sector is one of the most broadly diversified with industrial companies representing airlines, railroads, truckers, equipment and leasing stocks, and logistics companies. Funds that track this sector will track a benchmark sector index like the DJTA.

The Dow Jones Transportation Index

The Dow Jones Transportation Average (DJTA) is a price-weighted average of 20 transportation stocks traded in the United States. The DJTA is, in fact, the oldest U.S. stock index, first compiled in 1884 by Charles Dow, co-founder of Dow Jones & Company. The index initially consisted of nine railroad companies, a testament to their dominance of the U.S. transportation sector in the late 19th and early 20th centuries, and two non-railroad companies. In addition to railroads, the index now includes airlines, trucking, marine transportation, delivery services and logistics companies.

Additionally, the S&P Transportation Select Industry index provides a secondary benchmark for the sector.

The Bottom Line

The transportation sector is central to the economy but sensitive to fuel and labor costs, regulation, and geopolitical events. Investors can access it through stocks or sector ETFs and mutual funds, and benchmarks like the Dow Jones Transportation Average and the S&P Transportation Select Index help track how energy-price shifts impact profitability and share prices.