ETF Of The Week: Airline Fund Flying High

January 25, 2019

Nowhere is the government shutdown having a more visible impact than at airports.

Each day that the shutdown drags on, fewer TSA agents and air traffic controllers are reporting for work, which in turn means longer security lines and slower aircraft inspections, and more flight delays and cancellations.

Even flight bookings are taking a hit, as federal employees and contractors have been forced to put their travel plans on hold while Congress and the White House squabble over reopening the government.

Yet the shutdown hasn't done much to dent earnings for the airlines themselves—not yet, anyway. On Thursday, American Airlines (AAL) posted a 12% increase in year-over-year quarterly earnings; Delta (DAL) and Southwest Airlines (LUV) also beat estimates in their earnings reports.

That's probably why the $84 million U.S. Global Jets ETF (JETS), which tracks global airline stocks, has seemed to mostly shrug off the shutdown's impact. Year-to-date, the fund is up 6.2%, almost on par with the SPDR S&P 500 ETF Trust (SPY), which is up 6.6%:

 

Source: StockCharts.com

 

Highly Concentrated In US Passenger Airlines

JETS tracks a range of companies involved in air travel, including airports, aircraft manufacturers and terminal services companies.

However, the vast majority of the ETF's portfolio is in passenger airlines, which comprise 89% of its holdings. Southwest, American and United Continental (UAL) are JETS' top three holdings, at 12% apiece; all three have reported stronger-than-expected Q4 2018 profits, buoying the fund.

JETS is also superconcentrated in U.S. stocks, with 81% of its portfolio in domestic stocks. A sprinkling of British (4%) and Brazilian (2%) companies round out the fund's top three country exposures.

Intriguingly, JETS weights its stocks by market capitalization as well as their passenger load, prioritizing larger air carriers over smaller ones. The fund's index also selects stocks using fundamental factors, including gross margins, sales growth and sales yield.

Only Direct Flight For Airline Stocks

JETS holds only 33 stocks, and with a 0.60% expense ratio, that narrow exposure doesn't come cheap. Nor is JETS the most liquid of funds: The ETF possesses a 0.23% spread and only sees about $1.3 million in average volume daily.

Still, JETS is the only direct flight (no pun intended) to pure-play airline exposure, making it a vital play for any investor in the transportation sector.

Though airlines have yet to see much impact from the shutdown, the companies are treating it as a given that they will. Southwest has reportedly lost $10 million to $15 million in bookings this month alone; and in its earnings report, Delta warned investors the shutdown could lead to double-digit percentage decreases in Q1 2019 earnings. So it isn't a question of if JETS will be impacted, but when.

Contact Lara Crigger at [email protected]

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