In April of this year, newcomer U.S. Global Investors introduced its first ETF — the U.S. Global Jets ETF (JETS ). Since inception, however, the fund has lost roughly 10% as airline stocks continue to selloff.
JETS Down Over 9%, But Manages to Attract Investors
Though the fund is currently in the red, JETS has managed to rake in over $30 million in total assets under management. While it is not the first airlines-focused ETF to be available on the market, it is the first to incorporate smart-beta methodologies.
JETS’ underlying index utilizes fundamental screens to determine the most efficient airline companies, with an emphasis on domestic carriers, although it provides diversification through exposure to global aircraft manufacturers and airport companies. More specifically, airline stocks included in the index are screened for investability, a minimum market capitalization of $100 million, and liquidity.
The index will always include the four largest U.S. passenger airline companies, as measured primarily by their market capitalization and, to a lesser extent, their passenger load factor, which receives a 12% weighting allocation of the Index. Each of the next five largest U.S. passenger airline companies receive a 4% weighting allocation of the Index.
The remaining airline companies meeting the Index criteria are then scored based on multiple fundamental factors, including their cash return on invested capital, sales per share growth, gross margins, and sales yield. Each of the four U.S. companies with the highest composite scores receives a 3% weighting allocation of the Index, and each of the twenty non-U.S. companies with the highest composite scores receives a 1% weighting allocation of the Index.
The resulting portfolio consists of 33 individual holdings. The top 5 holdings (and allocations) currently include:
- Delta Airlines (DAL) – 12%
- Southwest Airlines (LUV) – 10.8%
- United Continental Holdings (UAL) – 10.2%
- American Airlines (AAL) – 10%
- JetBlue Airways (JBLU) – 4.3%
Airline Industry Headwinds and Tailwinds
So far this year, airline companies have struggled to keep afloat, with many logging in losses of over 20% on the year. Many airliners have already announced their intent to cut capacity, as rising seat numbers will likely cut into profits in the coming quarters.
Recently, American Airlines stated that it expects passenger revenue per available seat mile to drop roughly 6% to 8%. Delta airlines said it will likely re-evaluate its planned 2% domestic expansion in Q4, while Southwest intends to cap capacity growth at 6%.
Short term, the fear that capacity will outgrow demand may push these stocks even lower. Long term, however, airlines still look promising—as these companies have continued to evolve their business plans—cutting and hedging costs while at the same time implementing pricing strategies aimed at boosting profits. Putting things in perspective, the International Air Transport Association (IATA) announced that the airline industry is slated to post record net income of $29.3 billion in 2015, up almost 80 percent from 2014.
As always, be sure to take into account industry trends, fundamental factors, and technical analysis before making any investment decisions. But for those looking to buy in on the dip, the JETS ETF may just be a promising long-term bet.
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Disclosure: No positions at time of writing.