US Global Investors Inc, the Texas-based investment advisor to US Global ETFs, recently entered a niche where two previous players had earlier ventured and failed. The recently launched US Global Jets ETF (JETS), which also happens to be the firm’s first exchange-traded product, is designed to track the broad airline industry and follows the relatively new but increasingly popular so-called “smart-beta” investment strategy.
The US airline industry made a smart recovery since crude oil prices started to decline last year. To be sure, between 2005 and 2008, more than half of US carriers operated under Chapter 11 bankruptcy protection. But things started to improve on cost rationalization, enhanced cargo demand and a pick-up in the domestic passenger numbers as the US economy continued to heal after the economic crisis of 2009.
Data available from the NYSE Arca Airline Index show stock prices of airlines as a group more than tripled since 2012. In fact, in December last year airline stocks hit the highest intraday level since February 2001, according to financial news agency Bloomberg.
JETS is the only airline-ETF available currently as two previous attempts by Guggenheim and Direxion ended poorly.
Guggenheim, then operating under the Claymore brand, launched the Claymore Airline ETF (FAA) in 2009 while Direxion launched the Direxion Airline Shares ETF (FLYX) in 2010. Guggenheim shuttered FAA in 2013 while Direxion closed FLYX in 2011.
The new fund tracks the performance of the US Global Jets Index, a gauge comprised of US and international passenger airline companies, airport and terminal service operators and aircraft manufacturers. The global airline universe is screened first and companies that meet the minimum liquidity criterion with a market capitalization of $100 million or above are included in the index. The fund’s portfolio is designed to hold between 30 and 35 airline stocks.
Passenger airline stocks dominate the new fund as JETS takes the top four US carriers and weights them at 12 percent each, based primarily on their market-cap and to lesser extent on passenger load factor. The next 5 US carriers get 4 percent of total assets each.
The remaining constituents are chosen based on fundamental factors such as cash returned on invested capital, gross margin, sales growth per share and sales yield. The top four holdings include Delta Airlines, Southwest Airlines, United Continental and American Airlines. JETS generally allocates 80 percent assets to domestic airline related stocks and assigns the remaining 20 percent to foreign positions.
While a recent Deutsche Bank report said airlines would generate $24.7 billion in operating income this year, investors should bear in mind JETS is likely to witness greater volatility due to its concentration in specific industries, i.e. it faces higher concentration-risk. Since its launch in April-end, the fund has notched-up more than $35 million in assets.
The fund has an annual expense ratio of 0.60 percent.
Disclosure: No holdings