Immediately following Election Day, the U.S. Global Jets ETF (NYSEArca: JETS) was among the industry exchange traded funds that surged in the wake of Donald Trump’s surprising victory. However, JETS has encountered some unfriendly skies to start 2017 and that scenario is related to politics.
JETS, the only ETF dedicated to airline equities, is off almost 1% year-to-date and that stems from concerns that President Trump and the Republican-controlled congress are moving slowly on the widely anticipated tax reform effort.
“Much of the pain has been a result of increasing concerns about competition, which could push down prices and hurt profit margins. But the slow progress of tax reform, highlighted by Paul Ryan’s comments yesterday, could also be a problem,” reports Ben Levisohn for Barron’s.
Still, there are encouraging fundamental factors for airlines, including low oil prices. Fuel is the largest input cost for airlines. The improving U.S. economy could encourage more business and leisure travel and airlines are generating impressive amounts of cash.
Airlines’ impressive ability to generate cash is one reason Warren Buffett shook off his long-standing aversion to the sector and recently unveiled stakes in several of the top holdings in JETS.
JETS follows a type of smart-beta index that screens for multiple fundamental factors, including cash return on invested capital (CROIC) with additional inputs based on sales per share growth, gross margins, and sales yield. The ETF includes a hefty tilt toward airlines, but it also holds aircraft manufacturers and airports & terminal services.
“While the potential benefits were priced in to an extent, shares have shown surprising resilience to any read across from recent policy gridlock despite having leverage to the dynamic (the group has performed in line with the S&P 500 since 3/17/17, the Friday before the AHCA was initially slated for a House vote),” according to a Morgan Stanley note posted by Barron’s. “And though Airlines have underperformed YTD, they appear to have retained a large portion of the post-Election benefits when looking at their market caps. Our firm forecasts tax reform as a 4Q17 event, as discussed below, the ramifications of which could significantly support the GDP+ industry both directly (reduced tax bills) and indirectly (stronger corporate travel).”
JETS follows the U.S. Global Jets Index, which uses fundamental screens to select airline companies, with an emphasis on domestic carriers, along with global aircraft manufacturers and airport companies.
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