An airline sector-specific ETF can capitalize on strong tailwinds in the global airline industry and potentially enhance a portfolio through the growth opportunity in the transportation segment.
On the recent webcast, An Airline Sector Strategy Including Boeing, American, United, Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, outlined a plethora of factors that could help support the airline industry outlook ahead. For starters, there were 2 million people flying in the U.S. every day in 2017 and the numbers have been increasing as the economy grows. Looking at the global picture, an expanding middle class is expected to contribute to increased airline traveling, with an expected 4.2 billion global middle class in 2022 and 5.2 billion in 2028.
The industry has experienced increased return on invested capital. For instance, the U.S. Global Jets Index shows a return on invested capital of 14.8% and the New York Stock Exchange ARCA Airline Index shows a ROIC of 11%, compared to the S&P 500’s 6% ROIC.
Free cash flow among domestic airlines are also experiencing their greatest increase in years.
Additionally, yield growth among airline companies is on the rise, with the New York Stock Exchange ARCA Airline Index showing a 1-year dividend yield growth of 25.88%, compared to the Dow Jones Transportation Index’s 1-year dividend yield growth of -1.69%.
The improving global economic conditions have also contributed to greater profits. Analysts project a record $38.4 billion in net profits for the global airline industry for 2018. Looking further out, the aviation industry is expected ton contribute $1 trillion to world GDP by 2026.
The rising strength in the airline industry has also attracted the attention of many investors, notably deep value investor Warren Buffett, whom recently stated on CNBC that he “wouldn’t rule out owning an entire airline.”
Value investors may also notice that the New York Stock Exchange ARCA Airline Index is trading at a relatively cheap 14x price-to-earnings, compared to 20x for the Dow Jones Transportation Index and 22x for the S&P 500 as of the end of January 2018.
Investors can look to the U.S. Global Jets ETF (NYSEArca: JETS), the lone ETF dedicated to airline stocks, to access the growth opportunity.
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. JETS is trading at a 10.0 price-to-earnings and a 2.2 price-to-book.
JETS is not a pure play on airlines as it is slightly diversified into aircraft manufacturers and airports & terminal services or infrastructure. The ETF also includes global exposure to North and South Americas, Europe, Asia and Australia.
Financial advisors who are interested in learning more about the airline industry can watch the webcast here on demand.