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Some funds hit the market at the right time, while others arrive too early or late at the gate. The Claymore/NYSE Arca Airline ETF (NYSE: FAA ) has an appropriate ticker symbol, but with the economy hitting an air pocket, this fund is likely to face plenty of turbulence as it attempts to take off. Consumers and businesses have both reduced travel as they face shrinking budgets, and this decrease in demand has hit airlines hard. Continental Airlines (NYSE: CAL ) , for instance, is down 33% so far this year. It is difficult to see a clear runway for the airline industry, or for this fund, until the economy stabilizes somewhat.
- Inception date: Jan. 26, 2009
- Expense ratio: 0.65%
- Net assets: $2 million
The fund holds 25 stocks in its portfolio, with a diversified 70/30 mix of domestic and international global airline companies. Top domestic holdings include well-known names like Southwest (NYSE: LUV ) , AMR (NYSE: AMR ) , Delta (NYSE: DAL ) , and UAL (Nasdaq: UAUA ) .
Right now, airlines are struggling. The U.S. Bureau of Transportation Statistics reported that November 2008 airline traffic was down 12.8% from 2007 and down 3.5% for the period from January to November, indicating how tough the environment is.
Lower oil prices are generally a positive for the airline industry, and the continuing decline in energy costs can bolster their bottom line. However, falling oil prices can be a double-edged sword. When oil prices were rising in the spring of 2008, oil hedges seemed to be the right thing for airlines to do. Now those bets don’t seem so smart, with oil prices down by more than two-thirds. Nonetheless, airlines that locked in prices at more than $100 a barrel still have to meet their commitments, and this obligation can be a drag on their performance.
Airlines are key to keeping the world connected, and that means that they're dependent in large part on strong global economies. With most of the world in an economic slowdown, the outlook for the Claymore Airline fund is likely to be stormy weather for some time to come.
Still, when economies begin to unfreeze, the fund may be a good place to benefit from an eventual improvement in the economic environment. A concentrated portfolio and limited operating history, along with a tiny amount of assets under management, make this fund suitable only for those able to take on considerable risk. I would not invest in this fund unless I thought travel would increase soon or that energy prices would stay low, or some other positive news convinced me that the sector was poised for a rebound. At this point, that's not a bet I'm willing to make.