After an almost two-year absence, investors finally have a dedicated airline exchange traded fund to consider. The U.S. Global Jets ETF (NYSEArca: JETS) debuted last Thursday.
For the moment, JETS appears to be a well-time launched. Sure, oil prices have recently rebounded with the United States Oil Fund (NYSEArca: USO) surging 16.2% over the past month. However, USO still resides about 85% below where it traded in August 2013 when what was then the only airline ETF on the market closed its doors.
When it comes to airlines’ costs, it is all about fuel and labor. Focusing on the former, the near-term outlook for JETS is compelling. First-quarter pre-tax profits for airlines, by at least one estimate, could surge fivefold thanks to lower oil prices.
Deutsche Bank “estimates that nearly 110 percent of the earnings gain will derive from lower fuel prices. It states that ‘the industry over the past several years has demonstrated its ability to successfully offset most, if not all, of the rise in fuel expense via a combination of cost savings and various revenue initiatives,’” according to U.S. Global Investors CEO and Chief Investment Officer Frank Holmes.
JETS tracks 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. [New Airline ETF Takes Off]
Over 46% of JETS’ combined weight is allocated to Delta (NYSE: DAL), Southwest (NYSE: LUV), new S&P 500 member American (NYSE: AAL) and United Continental (NYSE: UAL). Delta has topped EPS estimates for eight consecutive quarters and American’s CEO is so bullish on his company that he has asked to be compensated solely in company stock, notes Holmes.
Even with last year’s surge on the back of falling oil prices, JETS’ holdings are not richly valued relative to the broader market. The ETF’s 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. [Fuel Costs and Transport ETFs]
“An important metric Deutsche Bank uses to illustrate that the industry is in expansion mode is operating margin, which measures a company’s efficiency in generating revenue. This figure tells you how much of each dollar earned the company keeps as profit after taxes. Generally speaking, the higher the number, the more efficiently the company is being run and the more capital it can use to pay down debt and return to investors in the form of stock buybacks and dividends,” according to Holmes.
For years, airlines were lousy dividend payers, but that is starting to change. Delta’s payout surged 50% last year while Soutwest’s dividend has risen sixfold since 2012. Those are JETS’ two largest holdings and combine for nearly 24% of the new ETF’s weight.
JETS Top 10 Holdings
Table Courtesy: U.S. Global Investors