After a weak start to the year, the transportation sector has been performing quite well thanks to an improved economic picture. Harsh weather conditions during the first quarter took a toll on most freight companies leading to reduced operational efficiencies and shooting costs, but that appears to be behind the space now.

However, a pick up in economic and manufacturing activity has led transportation companies to register a good rebound. The sector is one of the leading indicators of a recovering economy, which necessarily reinvigorates demand for movement of goods across many sectors. This was especially true for Q2 with the U.S. economy expanding by a solid 4.2% after contracting by 2.9% during the first quarter of this year.

In fact, the transportation sector was one of the strong performers during the Q2 earnings season with the companies in the space handily beating their earnings estimates. The sector recorded an 11.5% year-over-year earnings growth and 81% of the 11 companies that comprise the Zacks Transportation Sector posted positive earnings and revenue beats (read: Where Will Transportation ETFs Go From Here?).

Moreover, with expectations of improved U.S. economic growth in the upcoming quarters and beyond, the transportation sector is primed to reap the benefits. Further the sector is expected to show 8.57% growth in total earnings during the second half of the year and a massive 25.7% growth in total earnings in Q1 2015.

Thus investors keen on riding the solid prospects should definitely consider adding transportation stocks to their portfolio. While investing in individual stocks could be an option, a more convenient way to invest in transportation stocks is to do it in basket form. Thus a look at the top ranked transportation ETF could be a good way to target the best of this segment.
 
About the Zacks ETF Rank
 
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class.
 
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
 
For investors seeking to apply this methodology to their portfolio in the Transportation space, we have taken a closer look at the top ranked SPDR S&P Transportation ETF ((XTN - ETF report)). This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ and is detailed below (see: all the Top Ranked ETFs).
 
XTN in Focus

XTN tracks the S&P Transportation Select Industry Index to provide exposure to the transportation sector. The fund holds a basket of 48 stocks and uses an equal weighted methodology. As such, the ETF nicely spreads out its assets among individual holdings and each security accounts for less than 3% of the total fund allocation.

Southwest Airlines, XPO Logistics Inc. and United Continental Holdings Inc. are the top three stocks, with a total allocation of 8.65%.

 The ETF is heavily skewed towards small caps with 46% allocation, followed by 32% exposure to mid caps, while large caps account for the rest. Style-wise, growth stocks account for more than half of total fund assets, while value stocks and stocks having blend qualities account for 21% and 24% share respectively (read: 3 Ultra Cheap Value ETFs for Long Term Outperformance).

Moreover, XTN is heavily exposed to the trucking and airlines sectors as these make up roughly 62% of the total exposure, while air freight & logistics and railroads account for 20% and 12.4% allocation respectively.

The fund manages an asset base of $276 million and trades in light volumes of roughly 34,000 shares a day. XTN is the cheapest product in the space charging 35 basis points and has a dividend yield of 0.4%. Performance-wise, the fund has returned a solid 17% in the year-to-date frame and 37.8% in the past one year (read: Industrial Metals Recovery puts these ETFs in Focus).

Given the improving fundamentals in this space on the back of a growing U.S. economy and its top Zacks ETF Rank, XTN is clearly poised to continue its winning streak. Hence, investors can surely consider adding this top ranked fund to their portfolios in the near term.

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