Exchange traded fund investors will be able to track the broad airline industry once again as U.S. Global Investors launches its first ETF.
ETF Series Solution and U.S. Global Investors, Inc. launched the U.S. Global Jets ETF (NYSEArca: JETS) on Thursday.
The new Jets ETF will try to reflect the performance of the U.S. Global Jets Index, which is comprised of U.S. and international passenger airline companies, aircraft manufacturers and airports and terminal services companies. The universe of airline companies around the globe is screened for investability, a minimum market cap of $100 million and liquidity. The underlying index will hold between 30 and 35 airline companies. [A New Airline ETF Could Take Flight]
Specifically, the index takes the top four U.S. airlines based primarily on their market capitalization and to a lesser extent their passenger load factor and weights them at 12% each. The next top five U.S. airlines receive a 4% weight. The remaining airline companies meeting the index criteria are then scored based on multiple fundamental factors driven by 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 score receives a 3% weighting and each of the twenty non-U.S. companies with the highest scores receive a 1% weighting.
On a phone interview, Frank Holmes, CEO and chief investment officer of U.S. Global Investors, said the ETF’s global exposure is broken down into 80% domestic airline-related stocks and 20% foreign positions. Additionally, the top four holdings will be comprised of what he dubbed “the four horses,” including United Continental (NYSE: UAL), American Airlines (NasdaqGS: AAL), Delta Air Lines (NYSE: DAL) and Southwest Airlines (NYSE: LUV).
Holmes also pointed out that while the underlying U.S. Global Jets Index (JETSX) is correlated to the NYSE Arca Airline Index (XAL), the Jets Index follows a smart-beta methodology and has outperformed the traditional benchmark.
Moreover, the sector is a relatively cheap play. Holmes said JETS’ underlying index shows a forward price-to-earnings ratio of about 9. In contrast, the S&P 500 index is trading near a 18.6 P/E.
Looking ahead, Holmes argues that the airline industry could blow away numbers over the next four quarters.
“Most pessimism appears to be from analysts. I got a chuckle of it,” Holmes said in a phone interview. “The Street and traders show big interest in airlines.”
The industry are seeing profits fly, buoyed by a stronger U.S. economy and lower fuel prices, reports Dan Taylor for National Monitor. For instance, UAL and LUV both predicted profit records would be broken this quarter after a record first-quarter earnings last week.
Moreover, Holmes pointed out that American Airlines CEO Doug Parker is pushing for company stock as payment for his work instead of a normal salary, reflecting tremendous confidence in the company and industry. Parker’s actions mirror those of others like Oracle (NYSE: ORCL) CEO and the late Steve Jobs at Apple (NasdaqGS: AAPL), which foreshadowed great success in their respective markets.
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