Rail Companies Gain Momentum: A Fresh Look at Transportation ETFs

Rail companies are surging on strong quarterly earnings, making transportation ETFs increasingly attractive as the economy reopens. The largest U.S. freight rail index just had its best three-day run since March, outpacing the S&P 500 after Canadian National Railway, CSX Corp, and Union Pacific reported impressive numbers.

I’ve been watching Canadian Pacific and Norfolk Southern closely as they prepare to report their Q2 results on July 28. Many analysts are flagging these as buying opportunities, and I’m inclined to agree. These companies are breaking through pandemic-induced capacity constraints with remarkable resilience.

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

Supply chains are finally recovering, though company officials admit they’re scrambling to meet soaring demand. During an earnings call, CSX CEO James Foote acknowledged: “They want additional capacity and we’re committed to do everything we can to react quickly to bring on more people, more capacity.”

What’s particularly compelling about rail transport is its efficiency advantage. Rail simply costs less than trucking, and with growing environmental concerns, I expect rail companies to capture an increasing share of the transport market.

As Jonathan Chappell from Evercore ISI puts it: “There’s always going to be some that is much more truck-appropriate. But there is a huge opportunity in that middle ground of stuff that could go on rail but just hasn’t historically.”

For investors wanting exposure to this trend, several transportation ETFs stand out: Legg Mason Global Infrastructure ETF (INFR), First Trust Nasdaq Transportation ETF (FTXR), and iShares Transportation Average ETF (IYT).

Honestly, I’m surprised more investors aren’t paying attention to this sector. While tech stocks grab headlines, these “boring” rail companies are quietly delivering impressive operational improvements that could translate to significant returns as economic activity expands.