IYT: Portfolio Adjustments Are Positives in View of Supply Chain Realities but Wait for a Suitable Point of Entry

Some will remember the dozens of container ships bottlenecked off the ports of Los Angeles in the United States back in September 2021 right in the middle of the post-Covid economic recovery. A record number of freighters (more than 70) waited up to several weeks to unload their cargo in Los Angeles and Long Beach.

For its part, China, one of America’s top trading partners, was also in a critical situation in terms of maritime transport with 242 container ships waiting for a berth throughout the country, including many anchored off Shanghai and Ningbo, ready for loading goods. This was all due to a giant traffic jam due to large export volumes, as well as disruption by a typhoon and the pandemic. This period coincided with the iShares Transportation Average ETF (IYT) which invests in leading US companies operating in the transportation sector hitting a low of $240.

Source: Trading View

While some of the side effects of the supply crunch could last till Q4-2022, there has been an improvement as U.S. retailers have adapted, namely by sourcing items from different locations, one of these being Vietnam. This South Asian country which has a large manufacturing base producing a large number of items sold in the U.S. started to ease restrictions in early October, after experiencing a surge in infection rates in Q2-2021. Thus, IYT started to rise till it reached the $280 record level, and is now at $275.

Now, in addition to transportation, IYT also includes airlines as well as railroad and trucking firms. The ETF comprised 50 stocks on Dec 31, up from 47 at the beginning of the month, and tracks the investment results of the S&P Transportation Select Industry Index, which is up about 33.53% in 2021.

Going deeper, railroads get the highest share in the fund, at 31.78%, down from 34.97% at the beginning of the month. Exposure to trucking has also been slightly reduced.


Source: iShares.com

This reduction of exposure to railroads is a positive in light of recent data from Tradeshift which point to some uncertainty in the supply chain (measured by invoice numbers) after global order volumes fell by 24 points in Q3 2021. This was “the biggest quarterly drop since the first lockdowns in early 2020”. Additionally, increase in the percentage assets held for Union Pacific (NYSE:UNP) from 17.82% (in early December) to 18.08% is another positive as after cutting the forecast for 2021 volume growth, due to supply chain disruptions hitting shipments, the company remains optimistic about this year’s overall volumes, projecting its growth “ahead of industrial production”.

Exploring further, the fund has increased the weight of the Air Freight and Logistics sector to 30.08%, up from 27.82% (early December), while exposure to Airlines has been increased from 13.49% to 14.23%. These increases should help the fund in light of a timid recovery of commercial passenger flights, as well as the continuing “boom” in air cargo, which should continue to deliver strong pandemic-induced growth, its strongest since 2017.

These portfolio adjustments, aimed at addressing new supply chain realities are a key factor that makes IYT as an ETF, a better choice than owning individual transportation stocks. In return, iShares charges an expense ratio of 0.40%, but this is compensated by dividends at a yield of 0.63% (30-Day SEC Yield). Another peer, the SPDR S&P Transportation ETF (XTN) comes at a slightly lower expense ratio, but I like IYT price-performance improvement since it moved away from the Dow Jones Transportation Average Index on July 19.

Finally, with the leading 10 names comprising more than 73% of net assets as at Dec 31, IYT comes with more concentration risks which explain its high degree of volatility. Thus, the first part of 2022 should be highly volatile as the markets are injected with a dose of realism after the Santa Claus rally. The share price may fall to the $260 level, constituting an opportunity to buy.