Oil Under $80: Here's What It Means For ETFs

November 05, 2014

Cheap Oil Winner? Airlines. But No ETF!

There are plenty of industries that have energy inputs as a significant cost of doing business: any company with a fleet of cars or trucks, any company selling cars and trucks, and any industry with significant energy use or petroleum feedstocks, like chemicals.

But if I had to pick one class of companies most directly and immediately influenced by the price of oil, it's airlines. A $20 drop in the price of oil is a direct bonus to the bottom line of any airline, and historically, the performance of airline stocks (proxied here by the NYSE Arca Airline index) is actually inversely correlated to oil more often than not:

XALWTICORR

Still, not everyone is convinced. Some analysts are wringing their hands thinking that airlines, faced with cheap oil, will go back to their over-expansive ways and reconfigure their businesses in ways that will spell disaster if and when oil spikes again.

ETF investors are faced with one of the terrible business decisions of all time made by the ETF industry: Where once there were two airline ETFs—one from Guggenheim and one from Direxion—there are now exactly zero. The last one, Guggenheim's FAA, closed in March 2013, right before the airline index went on a tear.

Airlines

The index is now up 86 percent since Guggenheim took it off the market, and you can see how it would have responded to the last month of oil prices. It's a darn shame. The best ETF investors can do now is the SPDR S&P Transportation ETF (XTN | A-62), which has some 23.5 percent of its exposure to airlines, and an additional 13.5 percent in air freight. It competes with the iShares Transportation Average (IYT | B-66), which is inferior both for being based on an archaic price-weighted index and being much less of a pure transportation play.

Talk about shutting the barn door after the horse has left. Still, I think airlines are the solid play for sustained cheap oil. Too bad the ETF industry missed the boat.


At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected] or on Twitter @DaveNadig.

 

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