Consider Transportation ETFs as Rail Companies Gain Steam

As rail companies come out with strong quarterly earnings and gain steam on the economic reopening, investors could look to transportation exchange traded funds to capture the expanding economic activity.

An index of the largest U.S. freight rail companies just enjoyed its best three-day advance since March, outperforming the S&P 500 after Canadian National Railway Co., CSX Corp., and Union Pacific Corp. reported quarterly earnings week, Bloomberg reports.

Looking ahead, Canadian Pacific Railway Ltd. and Norfolk Southern Corp. are set to report their second quarter results on July 28, and many analysts see rail companies as buy opportunities.

Market watchers are growing more optimistic due to the view that these key transporters of the country’s goods and raw materials will break through capacity constraints they’ve encountered under the pandemic.

“These guys are among the best companies that I cover,” Citigroup Inc. analyst Christian Wetherbee told Bloomberg, citing improved operating margins. “That’s an outsized improvement for old-school industrial companies.”

With supply chains coming back online, company officials stated that they are trying to keep up with increasing demand.

“They want the additional capacity and we’re committed to do everything we can to react as quickly as we can to bring on more people, more capacity to serve those customer needs,” CSX Chief Executive Officer James M. Foote said during an earnings call.

Furthermore, many believe transport by rail is a more efficient means to get goods to consumers. Travel by track costs less compared to the trucking industry, and concerns over environmental impacts could help the rail industry capture a larger share of the market.

“There’s always going to be some that is much more truck-appropriate,” Jonathan Chappell, an analyst at Evercore ISI, told Bloomberg. “But there is a huge opportunity in that middle ground of stuff that could go on rail but just hasn’t historically.”

ETF investors who are interested in gaining exposure to the rail industry can look to transportation ETFs, such as the Legg Mason Global Infrastructure ETF (NASDAQ: INFR), First Trust Nasdaq Transportation ETF (FTXR), and iShares Transportation Average ETF (IYT).

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