Why This Airline ETF Has Crushed Its Transportation Peers

Airline stocks have a long and varied history, having gone through boom periods only to see many industry giants suffer through bankruptcy, leaving shareholders with massive losses. Yet things have changed for airlines over the past five to 10 years. Consolidation in the industry, reduction in overcapacity, and the rise of ancillary revenue from baggage fees and other sources has bolstered airlines, making them more profitable than ever. Although exchange-traded funds that focus on the transportation industry have captured some of the positive impact of strong airline stocks, their returns have been watered down with exposure to other subsectors under transportation. One pure-play airline ETF has done a much better job of delivering returns to shareholders, and bullish investors hope those trends will continue.

Data source: Fund providers.

Capturing airline success

Despite its name, the U.S. Global Jets ETF provides investors with access to the global airline industry. The four airline giants of the U.S. market make up nearly half of the fund's assets, with roughly equal allocations to each of the four. Smaller regional carriers in the U.S. represent between 20% and 25% of fund assets, and aircraft manufacturers have roughly a 10% allocation in the fund. However, you'll also find airline stocks from around the world, including Canada, France, Germany, Switzerland, the U.K., Japan, and Australia. Emerging market countries like China and Mexico are also represented in the fund.

As the only pure-play airline ETF, U.S. Global Jets has benefited from the fact that airline stocks have outperformed their peers in other industries of the transportation sector. Despite being just two years old, U.S. Global Jets has already given investors strong performance, including returns of nearly 50% in just the past year. Foreign airlines in particular have outperformed their domestic counterparts, helping to push up the ETF's returns in 2017.

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Why other transportation ETFs are lagging behind

The reason U.S. Global Jets has done so much better than the broader transportation ETFs in the sector is that other areas of transportation have underperformed. For the SPDR ETF, the biggest problems have been rental car companies, which have struggled to keep up with the pace of innovation in the sector. The rise of car-sharing services has threatened part of rental car companies' business model, and although they've moved to adapt to the trend themselves, the hits to their share prices have been ugly, with total declines of between 30% and 85% over the past two years.

The iShares ETF doesn't have as much exposure to the rental car industry, but it has been saddled with other poor-performing companies in the transportation sector. Railroad and trucking stocks have had their ups and downs, but the industries haven't had the same catalysts for massive growth that airlines have enjoyed recently. That has shown up in the returns for ETFs that include more of them in comparison to the airline ETF.

Can airlines keep flying?

The airline industry has been cyclical in the past, and many investors expect that a downturn in airline stocks is inevitable. When that happens, the airline ETF will give up some of its recent gains. Yet if you believe that the turnaround the airline industry goes beyond cyclical ups and downs and reflects fundamental change in the business models that airlines use, then using the U.S. Global Jets airline ETF for exposure to the industry could bring strong returns over the long haul.