Airline stocks are currently a risky investment, despite their low prices. Could the obscure US Global Jets ETF [JETS] be a safer and better long-term opportunity? With planes grounded due to cross-border travel restrictions and passengers reluctant to travel cross-country by air, airline stocks have nosedived during the Covid-19 pandemic.
Delta Airlines’ [DAL] share price closed at $26.25 on 26 May. Although this was 36.7% above a low of $19.19 achieved last week — its lowest point in more than six years — Delta Airlines’ share price is still 57% below its 52-week high of $62.26 set last July. Meanwhile, United Airline’s [UAL] share price closed at $30.50 on 26 May, 43.9% above mid-March low of $21.2 — its lowest point since 2013 — but 67.9% down from a 52-week high of $95.28, also set last July.
United Airline's share price rise between mid-March and 26 May
Other major operators, including American Airlines [AAL] and Southwest Airlines [LUV], have seen their share prices follow a similar trajectory, as previously flattened airline stocks have staged a small recovery on hope of easing lockdowns globally. But has the Jets ETF experienced a similar trajectory?
The US Global Jets ETF has seen an influx of investor interest, despite its share price hitting turbulence in the past few months.
Buffett rebuffs airlines
At the start of the month, Warren Buffett revealed at Berkshire Hathaway’s annual meeting (held virtually) that he had sold his holdings in the aforementioned four major airlines in April. According to the Financial Times Buffett had sold $6bn of stock in April related to airlines but no details were given.
Valuation of airline-related stocks sold by Warren Buffett in April
Buffett said the airline business had “changed in a very major way,” adding that the future was less clear to him on how airlines would continue to perform. At the time of speaking on 2 May, the stock markets hadn’t yet reached the bottom of their current dip, nor shown any signs of recovery.
While some airlines are hoping to restart domestic travel in June, others have said that they’re not experiencing as many cancellations for July as they had expected. However, what investors will want to see is whether the fewer cancellations will be coupled with an increase in bookings and revenue. If there aren’t signs that travellers are willing to take to the skies in near future, the short-term prospects of airlines are likely to remain up in the air.
Exotic ETF garners attention
Rather than taking the risk of putting money into one airline stock, investors are turning to an obscure ETF. The US Global Jets ETF follows the US Global Jets Index, which places an emphasis on domestic carriers, along with global aircraft manufacturers and airport companies.
Jets has seen a significant influx of investment and strong asset growth during the period of economic turbulence. MarketWatch data shows there are currently 55.7 million shares outstanding (on 27 May) up nearly 3,600% on the reported 1.4m shares outstanding in the middle of February.
Rise of outstanding shares from mid-February to 27 May
Jets uses a smart beta, rule-based methodology. The top four airlines receive a weighting of 12% each, recalibrated regularly. Frank Holmes, founder of the ETF told Bloomberg that this top 48% of the portfolio helps to capture the bulk of US domestic travel.
The bottom 20% is split evenly between the top 20 foreign airline companies — using a composite fundamental rank including highest cash returns on invested capital, growth and revenue and other factors such as traffic flow.
In between these top and bottom-ranked stocks is a small group of miscellaneous stocks that in airports, manufactures and smaller airlines. Holmes says that each quarter stocks will be removed and replaced if don’t have the highest cash returns on invested capital or are not showing revenue growing. “It’s a dynamic approach each quarter except for the big four names,” Holmes explains.
Share price performance
The US Global Jets ETF closed at $15.31 on 26 May, 36% above its 52-week low of $11.25 but 52.6% below its 52-week high of $32.36 — it’s share price had also taken a hit following Buffett’s announcement.
The share price of the US Global Jets ETF may not have moved much since it plummeted in March, but what makes it attractive is that it’s considered a much safer option than individual stocks. And if the industry can overcome the current headwind, the ETF could eventually deliver strong returns.
“The industry has historically been affected by external event like oil crises, terrorist attacks and currently the coronavirus, but we believe it will be among the first to rebound once the economy recovers following the COVID-19 crisis,” said Jet’s issuer, US Global ETFs.
“The industry has historically been affected by external event like oil crises, terrorist attacks and currently the coronavirus, but we believe it will be among the first to rebound once the economy recovers following the COVID-19 crisis” - Jet’s issuer, US Global ETFs
According to a Seeking Alpha analysis, those “looking to ride the Jets effect might want to consider smaller airlines [e.g. Hawaiian Holdings [HA]] where Jets controls a larger percentage of the outstanding shares … Even if the skies remain cloudy for Jets, you can take advantage of the rising assets to take a different tack on the long airlines trade.”
Furthermore, according to Todd Shriber, writing in InvestorPlace the US Global Jets ETF “eliminates the burden of picking the best idea in a troubled industry and any incremental good news, be it about the economy or industry itself, could stir near-term gains for the airline fund.”
Leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders.