The recent turbulence in the transportation sector, sparked by United Parcel Service UPS’s disappointing performance on Jul 23, has cast a shadow over investors’ sentiment, fueling caution regarding both the stock and the broader industry.
UPS Fails to Deliver in Q2 Earnings
Despite United Parcel Service seeing an uptick in volume growth within the United States for the first time in nine quarters, the company struggled to execute its turnaround plan efficiently. Earnings per share dropped to $1.79, missing the Zacks Consensus Estimate by $0.19. Revenues also fell short, declining 1% year over year to $21.8 billion, affecting UPS’s profitability amid increased labor costs and subdued demand post a pandemic-induced surge in e-commerce deliveries.
Market Reaction in Wake of UPS’s Slide
Following UPS’s disheartening quarterly results and pessimistic outlook, the company experienced its steepest decline in 25 years, plummeting by 12%. This downturn reverberated across the ETF landscape, with iShares U.S. Transportation ETF (IYT), First Trust Nasdaq Transportation ETF (FTXR), and SPDR S&P Transportation ETF (XTN) dropping by 1.9%, 2.6%, and 0.9%, respectively, on the same day.
Navigating the Road Ahead
Despite the recent setbacks, investors should not hastily dismiss transportation ETFs from their investment portfolios. These funds offer diversified exposure to various sectors within the industry, such as railroads, airlines, and trucking, cushioning potential blows from underperforming giants like UPS.
IYT allocates around 27.2% to railroads and nearly 21.5% to airfreight and logistics. FTXR boasts a significant stake in automobiles (26.9%) and delivery services (16%). XTN, on the other hand, leans heavily on cargo ground transportation (31.4%) and passenger airlines (24.6%).
While UPS constitutes 9.3% of the IYT portfolio and 6.7% of the FTXR portfolio, XTN adopts an equal-weight approach for its securities. Though IYT stands out for its popularity and liquidity, XTN offers cost-efficiency with annual fees as low as 35 basis points.
All three ETFs flaunt a Zacks ETF Rank #2 (Buy), implying potential outperformance against the broader market in the near future. Yet, with the transport sector’s earnings anticipated to decline by 12.6%, as per the Zacks Earnings Trend report, ETFs may continue to grapple with headwinds.