Transportation companies (e.g., railways, air delivery, trucking, shipping, etc.)¬†move materials and unfinished goods to¬†industrial giants like Caterpillar, Boeing and General Electric. Many believe that if the transporters are “on the go,”¬†then the economy is showing signs of health.
In contrast, some investors used to turn to¬†the¬†“phone companies”¬†for safer haven investing during recessionary periods. Historically, the higher-than-average dividends¬†acted as a buffer to¬†economic¬†uncertainty.
These are two very different economic segments. And yet, the iShares DJ Telecom Fund (IYZ) and the iShares DJ Transports (IYT) hold the top two spots for U.S. sector funds in relative strength percentile rank.
Are investors combining the growth aspect of moving commodities (“stuff”) with the value aspect of “higher-yielding bargains” from the communications bin? I don’t think so. I think it’s all about “risk-on” growth assets… and that includes the changing nature of telecommunication services in our everyday lives.
It is true that transports do well in a strong economic environment. Yet it is even more accurate to say that they do well in anticipation of a strong economic environment. While the Fed isn’t announcing the size and scope of its quantitative easing (QE) intentions until November 3, investors have been bidding up transporters via¬†iShares DJ Transports (IYT) because the QE actions worked in 2009.
At least for now,¬†the¬†transporters are rising rapidly because they¬†transport “reflated” resources¬†from¬†materials providers to¬†big industrial firms like the Home Depots and 3Ms of the world.¬†At the moment, anyway,¬†the Fed’s spark plug is igniting¬†the shares of¬†iShares DJ Transports (IYT).
So, then, what’s the story with the¬†significant outperformance of funds like iShares DJ Telecom Fund (IYZ) and iShares Global Telecom (IXP)? Aren’t investors stretching for yield in a U.S. market with zero interest rates?
Indeed… there’s some of that. In fact, due to a 4.0% annual yield for iShares Global Telecom (IXP) back at the start of 2010, I incorporated the fund¬†in a 7-ETF portfolio for beating the S&P 500.
However, the real story is the fact that… while American consumers may have slashed budgets and increased savings since the “Great Recession” began…¬†they still managed to increase¬†spending on mobile phone equipment¬†and communication services. That should have helped funds like iShares Telecom (IYZ) in the 10/07-3/09 bear, but it did not.
Consequently, shares of telecom corporations are quite reasonably priced. Investors may be¬†recognizing that they are primed for growth in any environment. And yes… there’s simply nothing shabby about above-average yields.
Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.