How the Transportation Sector Works
The transportation sector is comprised of several types of companies within the transportation industry:
Air freight: Companies that provide shipping and logistics services requiring aircraft carriers.Airlines and aviation services: This can include companies that service or manufacture airlines, air traffic control systems, heliports, and landing strips.Marine transportation: Companies involved in transporting goods or people across waterways.Highway and motor carriers: Companies involved in transporting goods or people across highways and roads. Public transportation companies would also be included in this subcategory.Freight railways: Companies involved in transporting goods or people via railway.Postal and shipping services: Companies that ship, transport, and deliver goods.Transportation infrastructure: Companies that build, repair, maintain, and support infrastructure across the U.S.
Pros and Cons of Investing in the Transportation Sector
Pros Explained
Easy to understand: Investing in what you know is a solid strategy. Since transportation companies are often household names (UPS, FedEx, American Airlines, etc.) and their business purpose is simple to understand, you may feel more comfortable investing in transportation stocks. More predictable growth: Transportation companies tend to perform cyclically, booming when the economy is hot and dropping when the economy dips. These cycles can help investors predict (but not guarantee) when stock prices will rise and fall.
Cons Explained
Does not perform well during recessions: Though the sector is cyclical, you won’t always be able to predict when a recession is about to hit. The transportation sector took a major hit during the 2020 recession, for example. The three-year average on the DJTA shows that during times of recession, this industry can see major declines. Performance is linked to the oil market: Since many transportation vehicles are fueled by oil, rising oil prices can impact this sector.
What It Means for Individual Investors
Transporting people and goods is a major industry—and while the transportation sector might rise and fall cyclically, factors like the rise in online shopping may support the industry for many years to come. Since we rely on this sector heavily in our daily lives, investing in the transportation sector could be a stable investment over the long term, especially if you select more stable investment products like ETFs.
How To Invest in the Transportation Sector
You can invest in the transportation sector in a few ways: exchange-traded funds (ETF) such as the Vanguard Industrials ETF, index funds such as the S&P 500 Transportation Select Industry Index Fund, or by researching and investing in individual companies within the transportation sector. To invest in specific companies, you’ll need to work with an investment company or purchase stocks through trading platforms like TD Ameritrade or Fidelity. Keep risks in mind whenever you invest. While stocks can produce higher returns, they’re often riskier and require more vetting and active involvement. ETFs and index funds are generally considered safer investment strategies for long-term investment growth but can yield smaller returns than individual stocks.
