When The Airline Industry Rebounds, This Fund Could Go Sky High

Airline stocks have been essentially grounded, for very good and obvious reasons.

But, like the rest of the stock market, as the airlines see the economy opening up, as the TSA tells us there are more travelers every day, as investors rotate into cyclical sectors and beaten down stocks, tarmac tied airline stocks should benefit, big time.

That said, timing the rise of airline stocks and choosing individual names isn’t the easiest game in town.

Fortunately, there’s a simple way to play the sector in one fell swoop.

The U.S. Global Jets ETF (JETS) is well worth looking at, if not taking a long-term position in.

This isn’t a new ETF that was put together so investors could suddenly jump into the beaten down sector.

The JETS ETF has been around since 2015.

But saying it’s been overlooked would be like calling the Grand Canyon a ditch.

No-one paid much attention to JETS, until it became a highflier recently.

Up until early March the fund had only about $33 million under management, that is tiny for an ETF.

As an investment or trading vehicle it was too small for me or my subscribers to bother with, primarily because of its thin daily volume and spreads that were too large to make getting in or out tenable.

That’s all changed.

$937 Million in 62 Days

As of today, JETS has grown to more than $970 million under management, having seen inflows over the past 62 consecutive trading days, according to FactSet.

Even better, daily volume’s been in the multi-million share range, which dramatically narrowed bid and ask spreads, and makes getting in and out of positions a breeze.

Besides those qualities the ETF sports an expense ratio of just 0.60%.

JETS, the ETF, tracks a proprietary index, namely the “U.S. Global Jets Index” which the ETF was built around. According to the fund’s prospectus, “The Index tracks the performance of Airline Companies across the globe with an emphasis on domestic passenger airlines. The universe of Airline Companies is screened for investibility (e.g., must be listed on a securities exchange), a minimum market capitalization of $100 million, and liquidity (minimum average daily value traded).”

The fund has some interesting concentration features based on how the Index is reconstituted quarterly. In other words, the Index isn’t static, it changes, so the make-up of the stocks in the ETF changes too.

The Fund says it generally expects the Index to include between 30 and 35 airline companies, but it allocates 48% of the Index and ETF to “each of the four largest U.S. passenger airline companies, as measured primarily by their market capitalization and, to a lesser extent, their passenger load factor.” Each of those stocks receives a 12 percent weighting allocation of the Index, and in the ETF.

The Index is rebalanced and reconstituted quarterly in March, June, September, and December.

According to a May 28, 2020 Supplement to the Summary Prospectus, dated April 30, 2020,

“At the time of each reconstitution of the Index, Each of the next five largest U.S. passenger airline companies receives a 4 percent weighting allocation of the Index. The remaining Airline Companies meeting the Index criteria are then scored based on multiple fundamental factors. Their score is primarily driven by their cash flow return on invested capital (CFROIC) with additional inputs based on sales per share growth, gross margins, and sales yield. Each of the four U.S. companies with the highest composite scores receives a 3 percent weighting allocation of the Index, and each of the twenty non-U.S. companies with the highest composite scores receives a 1 percent weighting allocation of the Index.”

While most investors probably think JETS is a “passive” fund, the way the Index and ETF are rebalanced it’s actually a very “smart beta” fund, and I like that a lot.

The Airline Industry WILL Rebound… and That Will Take JETS Sky High

There’s no doubt the airlines are all hurting, and in my opinion will need a lot more government support. But they are national assets and indispensable.

They might get more beaten up, and the government might take stakes in them for equity or extract warrants against more loans they need. I just know, in the end, they will survive, most of them for sure.

The fact that JETS rebalances its portfolio makes it a safer bet if some airlines are going to be grounded longer or end up failing to takeoff ever again.

Long-term the airlines are going to fly high again, and JETS is a good long-term way to take that ride with them.

Check it out.

— Shah Gilani

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Source: Total Wealth