Bullish On America? This Is Your ETF

12/19/2012 7:45 am EST

Focus: ETFs

Richard Young

Editor, Young's Intelligence Report

This exchange traded fund invests in the core of what drives the US economic engine: rail and ground transportation, observes Richard Young of Intelligence Report.

The 20 stocks held by the iShares Dow Jones Transportation Average Index Fund (IYT) are big transportation companies that move goods around the country and the world. This group of companies sees robust growth during the upswing of an economic cycle, but has the staying power to survive cyclical dips.

The companies in the iShares Transports fund are durable businesses. They are the pipelines of the world economy, serving as the vital link between producers and consumers.

The top five holdings in the iShares Transports fund include three Class I railroads-Union Pacific (UNP), Kansas City Southern (KCS), and Norfolk Southern (NSC)-and the world's two largest parcel service companies, FedEx (FDX) and UPS (UPS). Three of the five are on my Common Stock Monster Master List. Union Pacific, the fund's top holding, is this month's No. 1 stock on my Top ten countdown.

Class I railroads are massive operations with rights of way that are in many cases over 100 years old. The tracks were laid down before many parts of the nation were settled. In today's world of environmental impact studies, lawsuits, and a vicious NIMBY crowd, gaining the rights of way to replicate the footprint of America's class I railroads would be nearly impossible.

For perspective, think about the controversy over the Keystone pipeline. Pipelines are quiet and unobtrusive. If a pipeline like the Keystone can't be done, a brand new railroad right-of-way with all the noise, ground-shaking, and crossings that slow local traffic is highly unlikely. The barriers to entry in the rail business are nearly impenetrable.

Kansas City Southern
This is the smallest railroad owned by the fund. KCS owns rail operations in the southwestern United States, Mexico, and Panama.

Arthur Stilwell founded what would become KCS in 1887 and built a local railroad to move goods around Kansas City. But Stilwell's dream was to build a railroad from Kansas City to the Gulf of Mexico. After much financial hardship for Stilwell, the railroad would eventually be built, ending in Port Arthur, Texas, named after Stilwell himself.

Today, KCS's rail network in the US and Mexico comprises 6,200 route miles throughout the southeast and southwest US and connects to all the other Class I railroads. After the recession, entrenched rail companies with strong fundamentals, like Kansas City Southern, bounced back.

Shipping Giants
FedEx and UPS, the two logistics and shipping giants in the fund, span the world with fleets of aircraft and trucks, and constellations of depots and warehouses worldwide. The failure of DHL in 2009 illustrated just how hard it is for new entrants to compete in the American parcel business. UPS and FedEx dominate the industry.

In 2011, UPS delivered an average of 15.8 million packages each day, for a total of 4 billion that year. The integrated air and ground network is the world's most extensive, serving 220 countries and territories. To make deliveries, UPS employed 101,876 cars, vans, tractors, and motorcycles. UPS owns 230 jets and charters over 300 additional aircraft.

Another component of the fund is Matson (MATX), a leader in Pacific shipping. Matson operates the Long Beach Express shipping route from Xiamen, Ningbo, and Shanghai to Long Beach, California.

The shipper is well known as a reliable operator. Matson has been a fixture in Pacific shipping since 1882, when Captain William Matson sailed to Hilo from San Francisco carrying 300 tons of supplies and merchandise. Later Matson would buy a bigger ship, and then more ships to continue expanding his trade operation between Hawaii and the mainland.

Today, Matson owns a fleet of 17 ships and charters three more. Matson also owns 34,000 containers, 14,000 container chassis and generators, and 900 auto-frames. Building a competing network of ships and warehouses would be difficult indeed.

Companies owned by the iShares Dow Jones Transportation ETF exist in high-barrier-to-entry industries, with business models not easily replicated today. In many cases, capital inputs spanning more than a century have built the businesses comprising the fund.

Unlike tech companies, who face the threat of the "next big thing," there is little alternative in the world of physically moving goods to market.

Related Reading:

One ETN Worth Your While

This ETF Has a Solid Foundation

A Top Energy Patch Mutual Fund

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