Exchange-traded funds (ETFs) can be great. They offer a quick and inexpensive way to buy the whole stock market, or just one small niche of it. However, not every corner of the market merits your investment -- and not every ETF needs to exist.

While I like the clever ticker symbol of the Claymore/NYSE Arca Airline (FAA) fund, I'm wary of its prospects. Airlines have been a notoriously unprofitable industry for eons. Even Warren Buffett has remarked:

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

Airlines face many challenges:

  • Fuel prices are volatile, and can quickly and drastically change the profitability picture.
  • Fare wars break out frequently, putting more pressure on the bottom line.
  • It's a capital-intensive business, requiring big bucks to buy new airplanes and maintain old ones.
  • It's also complicated, requiring careful logistical arrangements.
  • Good old Mother Nature can force airlines to cancel flights and aggravate customers.

Keep this investment on the tarmac
Since 1992, the Amex Airline Index has lost ground, down roughly 14%. The long-term records of some of the component companies in the airline ETF look no less dire:

Company

10-Year Average Annual Return

20-Year Average Annual Return

30-Year Average Annual Return

Southwest Airlines (NYSE: LUV)

0%

13.6%

15.8%

Delta Airlines (NYSE: DAL)

N/A

N/A

N/A

Continental Airlines (NYSE: CAL)

(5.2%)

N/A

N/A

AlaskaAir

2.3%

3%

N/A

AMR (NYSE: AMR)

(10.7%)

(1.7%)

5.3%

S&P 500

(2.3%)

6.3%

8.3%

Data: Yahoo! Finance.

Why are there so many "N/A"s? Many airlines have been in and out of bankruptcy protection, emerging as new entities. United Airlines (Nasdaq: UAUA), Delta, and Continental have each filed for Chapter 11 protection -- sometimes more than once. As you can see above, Southwest is a rare exception in the industry: an airline that has actually managed to return money to shareholders.

Investments that'll really take off
Before you consider investing in the airline industry, examine your portfolio's big picture. For many investors, having a big chunk of your money in the overall market, rather than specific sectors, makes a lot of sense, since it keeps you from trying to guess what various stocks or segments of the market will do in the short term.

There's a place for more focused ETFs (or mutual funds), though, at times when you may be interested in an industry but don't necessarily have the expertise to invest in individual stocks. The First Trust NYSE Arca Biotech Index (FBT), for example, will instantly park you in 20 companies such as Amgen (Nasdaq: AMGN) and Amylin Pharmaceuticals (Nasdaq: AMLN). It's a young fund, but it has trounced the market over the past three years.

ETFs can also come in handy when you're bullish or bearish on a whole sector -- and here, the Airline ETF might play a role. It has done well since early 2009, rising more than 50%, and those who thought the airline stocks were grossly undervalued last year have made some good money. They just need to keep the industry's long-term picture in mind. If you're bearish on the airline industry, you might consider shorting this ETF, thereby betting that its basket of airline stocks will descend in value over time.

Longtime Fool contributor Selena Maranjian owns shares of Amgen. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.