The Dow Theory Play

Published on Thursday, 26 January 2012 18:49 Written by Todd Shriber

New York, January 26^th  (TradersHuddle.com) – For those not familiar with the tenets of the Dow Theory, one of them is, to paraphrase, that transports confirm a move in industrials. That’s applicable in either direction, but the path of least resistance at the moment appears to be higher making the iShares Dow Jones Transportation Average (NYSE: IYT) worth a look.

Stocks that fall under the transports designation are widely recognized names that are often viewed as accurate temperature checks on the health of the broader economy, so it is odd in some ways that IYT faces no competition for the title of top transportation ETF. The reality is IYT, is the ONLY legitimate transports ETF on the market.

Home to 21 stocks and almost $443 million in assets under management, IYT made its debut in late 2003 and since then, has seen nary a challenger. The expense ratio of 0.47% is average at best for a pure play U.S. sector fund, but with no credible challenger on the market, there’s no need for iShares to lower IYT’s fees.

The composition of IYT, particularly in the current market environment, is important for traders and investors to acknowledge. The transports universe usually includes four types of companies: Airlines, package shippers like FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS), railroad operators and trucking firms. In an era of high oil prices, all of those sectors are vulnerable to increases in fuel prices, though fuel costs are less of a problem for railroads than the other companies calling IYT home.

Therefore it’s not a bad thing that railroad operators account for over 28% of the ETF’s weight. In fact, Union Pacific (NYSE: UNP) and Norfolk Southern (NYSE: NSC) represent over 20% combined. FedEx and UPS combine for another 17% and that’s noteworthy because massive financial problems at the U.S. Postal Service could be a boon for those stocks and IYT, according to a research note published by Standard & Poor’s Capital IQ.

Overall, airlines, the group most vulnerable to higher oil prices, account for under 13% of IYT’s and major carriers such as Delta (NYSE: DAL) and Southwest (NYSE: LUV) receive allocations that are barely above 1% each. US Airways isn’t even featured in the ETF. Put another way, IYT maybe be attractive because of what is NOT featured in the ETF and by not featured we mean an excessive allocation to airline stocks.

Year-to-date, IYT has outperformed the Dow Jones Industrial Average, but lagged the performance of the S&P 500. While there isn’t much upside from where IYT closed on Thursday and its 52-week high, the ETF could break out to new highs if U.S. economic data continues improving. A combination of strong employment, manufacturing and construction data could be just what IYT needs to be a leader not a follower in 2012.