As we head into 2021, it may be an ideal time to invest in the global recovery through airlines and a sector-related exchange traded fund.
In the recent webcast, Fly Into 2021 With Optimism for Airlines, Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, highlighted the growing popularity of the U.S. Global Jets ETF (NYSEArca: JETS) as a way to access recovery in the global airline industry.
JETS has also become a popular mechanism for many retail investors to gain diversified exposure to the airline industry as opposed to betting on single airliners. The airline ETF has seen significant inflows from deep-value retail investors and institutional investors like hedge fund managers. These inflows have accelerated and hit record highs as the outlook for an effective COVID-19 vaccine has become more promising, pushing airline stocks higher.
Many have turned to JETS as a way to bet on the broad recovery of the airline industry that has been among the hardest hit by the coronavirus pandemic after global governments halted air travel in a bid to contain the virus. The play has also been a way for investors to bet against Warren Buffett, Berkshire Hathaway Inc.’s chief executive, who sold major stakes in the four biggest U.S. carriers earlier this year, which have may cost him $2.7 billion. Airline stocks have climbed 63% since Buffett announced he was dumping airlines.
Are Airlines Back?
Investors may draw similarities to what is happening now to what happened during previous global crisis events. For instance, airline stocks rebounded in the following six months after the 9/11 crisis, surging more than 80%. The industry climbed more than 120% in the six months after the SARS crisis. The sector also recovered more than 80% following the 2009 financial crisis.
However, unlike previous events, the White House has specifically provided targeted financial aid to the airline industry through the CARES Act. One in 15 jobs in the U.S. is airline-related.
Airline stocks are also recovering on plans to increase flights as coronavirus pandemic fears abate. The number of daily U.S. commercial air passengers rose to a high of about 1.18 million at the end of November, compared to the 87,500 low in mid-April. Flight radar data has revealed more planes are taking to the skies. Meanwhile, carriers are adding more airline routes.
Traders may have seen the U.S. Global Jets ETF as an easy-to-use way to get in on an oversold market – airline stocks were the most oversold since 9/11 when rising fears of terrorist threats sent travel stocks reeling. The U.S. Global JETS Index, which acts as the underlying benchmark for JETS, was still trading at 12.4 price-to-earnings as of the end of September, compared to the 31.9 P/E ratio for the broader S&P 500 Industrials Index.
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.
The JETS portfolio follows a type of smart beta indexing methodology where the top 4 North American domestic airlines based on a ranking of market capitalization and load factor receive a weight of 10% each. The next 5 North American airlines based on a ranking of market capitalization and load factor receive a weight of 4% each. A composite fundamental rank is calculated for the remaining North American airline industry companies, screening for cash flow, sales growth, gross margin, sales yield, and return on capital where the top 5 securities based on this rank receive a 3% weight each. Lastly, a composite fundamental rank is calculated for foreign airline industry companies, screening for cash flow, sales growth, gross margin, sales yield, and return on capital where the top 25 securities receive a 1% weight each.
Financial advisors who are interested in learning more about the airline industry can watch the webcast here on demand.