The US Global Jets ETF (JETS) launched more than five years ago and occupied a quiet place in the ETF landscape, offering exposure to the airline industry. But when the pandemic profoundly impacted the world economy, and the airline industry in particular, JETS came roaring out of nowhere. Not only has the ETF attracted nearly $1.5 billion in new assets since March 1, the fund suddenly became a go-to airline investment vehicle for all sorts of investors, from retail, to short-sellers, to tactical investors. JETS is one of two ETFs from U.S. Global Investors, the other being the U.S. Global GO Gold and Precious Metals Miners ETF (GOAU), a $126 million fund focused on precious metal mining firms. Frank Holmes is the CEO and chief investment officer of the publicly owned firm, which is known for its mutual funds offering exposure to gold, natural resources and emerging markets and has $2 billion in assets under management. We spoke with Holmes about JETS and how the idea for it came while traveling in the course of his work in the gold industry.
ETF.com: “JETS" has been one of the ETFs of the year in performance and popularity that’s seemingly come out of nowhere. What was behind the idea?
Frank Holmes: I was noticing on my global travels, going to Asia and Africa every year for work with gold company CEOs, that my options to fly had dropped by 30%. The cost of my tickets had doubled. I said to myself, “The airline business has got to be making a lot of money, because they’re just forcing you to pay so much more for your tickets.” At the same time, I was also saying to myself, “I have to get into the ETF business.” So, I went back to my roots of a quant-fundamental approach, did backtesting and recognized there was no airlines ETF.
There had been one started and soon closed, ‘FAA’ [Guggenheim Airline ETF], which was market cap driven. I had a quant approach, and what I didn’t realize at the time is that I was doing what they call “smart beta 2.0,” because not only are you looking for the factors that help you pick these airlines and industry stocks better, you’re also caught up with portfolio construction.
What I found was that the four big U.S. airlines—Delta, Southwest, United and American—were capturing 70% of all travel. Southwest was the only one that never went through a bankruptcy problem. The other ones had all gone through those trying periods. Our quant approach showed that it was best to do mean reversion. You recalibrate those four big names every quarter.
We also noticed that the currency volatility of the EU versus Asia had a big impact over your performance. So, in that portfolio construction, we minimized all the global names to 20 stocks. And they would be capped at 1%. They were never a big allocation, but they were able to catch big runs in Europe airlines or Asia airlines, and that improved our performance.
ETF.com: JETS launched five years ago and hadn’t gained much traction until this year, when the pandemic hit the U.S. economy. What were you thinking the first few days when the country began locking down, air travel came to a near standstill, and you have an airline ETF?
Holmes: Well, I saw all my assets basically halved. And I was sort of stunned. I thought, “I have to lay off people. I have to downsize. This is quite serious.” And then [Bloomberg’s] Eric Balchunas called me and said “The three cheapest ETFs (as measured by P/E ratio) in the world now are coal, Nigeria and JETS. Why JETS?” And he said, “I know why people are afraid to go to Nigeria. And I know why they aren’t into coal. But what about JETS?”
I explained to him that I thought government policies would do everything they could for the industry because they made mistakes not getting people flying faster before. They learned this after 9/11 and 2008.
With JETs, we started seeing interest coming from two big parties. The first was millennials. There was something happening on the retail side, hundreds of thousands of new accounts were opening at Robinhood, TD Ameritrade and Schwab. And with Robinhood, you were able to see how many investors were taking in your stock. Over a 70-day run, something like 25,000 millennials bought JETS before it jumped 50% from the low.
Second, there were the hedgies, who were shorting American Airlines because it has the greatest debt-to-equity ratio of any airline, and it could be the most likely to go bankrupt again. They were using JETS to hedge the risk.
Then, in the first week of June, American Airlines jumped 40% in a day because there was massive short covering. But what we saw was massive buying into JETS, 20 creates at a time, because they’re putting short positions on the airlines, hedging themselves. We also had more sophisticated, tactical investors coming into the fund.
ETF.com: I find ironic the wide range of buyers. Obviously, the shorts had a different reason than, say, the millennials. But they were buying a downtrodden sector, which is not what you typically see in behavior finance. I thought that was extraordinary.
Holmes: Absolutely. What also surprised me was where millennials were getting their research. I found out that the millennials predominately get their research from YouTube and podcasts. So, I go on YouTube and I start looking up airlines, and all of a sudden I started seeing all these people covering the airlines industry. I was so impressed. One guy had 2 million followers. These 2 million followers are actively interested in airline travel. There is another person called DJ Aviation [with 300,000 followers]. He has informative, four-minute videos, and I reached out to him just to find out it’s a 19-year old kid who’s passionate about airlines. They did analysis of all the major airlines and what were the best buys.
ETF.com: Were they recommending JETS?
Holmes: We weren’t getting people recommending JETS. But I had spent five years promoting the fund. We did 20 webcasts. Every quarter we did a webcast updating on JETS. We planted seeds. People were aware of it in the RIA space.
Then we began to see these tactical traders coming in. Every time oil fell, they jumped into JETS. And then, every time oil started to rise, they jumped out. It was interesting to watch. You had this ecosystem in which 20% of the trading was tactical against the price of oil.
ETF.com: What also struck me is that you have these diverse buyers who went to an ETF, and not to the individuals stocks. They get it. It wasn’t even a matter of, “Can you explain to me what an ETF is?”
Holmes: Investors are much smarter, much more sophisticated than in the ’90s when everyone was driving into mutual funds. The other thing being contrarian is all the negative news on millennials. People say they don’t know what they’re doing. Well, I just got empirical evidence to say 25,000 of them, or at least $100 million [in assets] made 50% on their money. That’s a pretty compelling data point.
ETF.com: Are you thinking about launching any more ETFs?
Holmes: I’m hoping in this quarter to launch a product that no one else has in the space, but I know the industry, so I can talk very confidently about it, both risk and opportunities. It would be a go-to play for people who want access to that space. It will be this sort of Smart Beta 2.0 model, where it isn’t just stock-picking factors, it’s portfolio construction and how it rebalances every quarter. But that’s all I can tell you right now.
Drew Voros can be reached at [email protected]