Despite the popularity of exchange-traded funds, or ETFs, for a variety of investments, the airline industry has lacked an ETF of its own. But U.S. Global Investors is planning to bring back the airline ETF.
For most investors, the question is whether they are better off buying the airline ETF or buying individual airline shares. Let's take a look at the ETF and what it means for investors.
Although there are no airline ETFs today, the idea has been tried before. Direxion created the Direxion Airline Shares ETF, rolling it out in December 2010 under the ticker symbol FLYX. However, it didn't get very far off the ground: It was shut down in October 2011. The ETF proved unprofitable for Direxion, attracting less than $3 million in assets -- well below the $50 million minimum Bloomberg cites as the level needed for profitability.
The Guggenheim Airline ETF, which rolled out in January 2009 and traded under the ticker symbol FAA, was a bit more successful, holding $21 million in assets when it was shut down. But even as the only game in town for airline ETFs, the fund never reached the levels Guggenheim wanted and was liquidated in 2013.
The new ETF
The latest airline ETF will be the U.S. Global Investors Jets ETF, using the ticker symbol JETS. Taking a similar allocation strategy as the Guggenheim Airline ETF, the Jets ETF will track an index comprised of 25 to 40 airline companies worldwide.
This should include the largest U.S. carriers Delta Air Lines (NYSE:DAL), United Continental Holdings (NASDAQ:UAL), Southwest Airlines (NYSE:LUV), and American Airlines Group (NASDAQ:AAL). But as a Global ETF, it will also include some non-U.S.-based airlines.
The expense ratio will also be similar to the Guggenheim ETF, with the Jets ETF charging 0.60% annually, compared to the Guggenheim's 0.65%. While the company has filed preliminary paperwork for the ETF with the SEC, it hasn't provided a release date yet.
Can JETS succeed?
The question many investors are asking now is whether this ETF can succeed in an area where others have failed, and which the ETF industry has pretty much abandoned. While the parallels between the Jets ETF and the Guggenheim ETF are notable, the airline industry has undergone a significant rally since the Guggenheim ETF was liquidated.
Most airline shares have more than doubled since the Guggenheim ETF was closed, and Bloomberg noted in July 2014, a time when airline shares traded below today's levels, that had the Guggenheim ETF held through the rally, its assets would probably have surpassed the $50 million level.
Today, the Jets ETF has a few things going for it. First of all, it has no pure airline competition. The closest thing to it right now would be transportation ETFs like the iShares Transportation Average ETF.
But transportation ETFs spread their assets across other areas, including shipping companies and railroads. The airline portion is well in the minority, making transportation ETFs far from an airline industry pure play.
However, with airline ETFs failing in the past, even without competition, this ETF needs to benefit from other factors as well. Here, the Jets ETF is helped by a return of investor confidence to the airline industry seen in rising share prices since the last airline ETF was liquidated.
If this confidence translates into ETF interest, the U.S. Global Investors Jets ETF may be able to grow into the range of profitability for the managers.
Should you buy it?
Ultimately, your decision on whether to go with the ETF or individual stocks boils down to what your airline investment strategy is. If you're bullish on the industry as a whole but don't know where to go, the airline ETF lets you cover almost all bases and benefit from industrywide growth.
However, if only a few airlines interest you, you'd be better off buying the individual stocks and avoiding buying into airline shares you find less favorable.
One of the keys of the Jets ETF is that it provides access to investing in foreign airlines. This can be a good or a bad thing. If you expect the worldwide airline industry to become more profitable, the Jets ETF is right up your alley.
But if you're just looking for exposure to the U.S. airline market, this can be done without the ETF. Investing in the big players is easy. Since Delta Air Lines, United Continental, American Airlines, and Southwest Airlines control around 70% of the U.S. market based on revenue passenger miles, buying a few shares of each can create a set of investments poised to benefit from gains in the U.S. market.
If you also want to add the smaller players, you can grab shares of Alaska Air Group, Spirit Airlines, JetBlue Airways, or Allegiant. Even if you want to expand to cover the Canadian market as well, you only need to add shares of Air Canada and WestJet Airlines.
So, your decision largely comes down to a worldwide versus North American investment strategy. If you are bullish on airlines worldwide, the Jets ETF provides access to a broad array of foreign -- and likely sometimes difficult to get -- securities, including less-liquid shares of European and emerging-markets airlines.
But if you're North American-focused in your investment strategy, you can cover the largest U.S. players with only four stocks, and the vast majority of the North American market with 10 stocks. Choosing this strategy would provide more flexibility in asset allocation while avoiding the Jets ETF expense ratio.
Return of the ETF
Until the U.S. Global Investors Jets ETF begins to trade, the airline industry will be one of the few major industries without an ETF of its own. Although previous airline ETFs have failed, the Jets ETF stands a better chance of success because of a return of airline investor confidence and a lack of airline ETF competition.
A decision on whether to go for this ETF or for individual stocks should be based on how you see the airline industry going forward, and how you would best allocate your assets to take advantage of the situation.
Alexander MacLennan owns shares of Air Canada, American Airlines Group and Delta Air Lines, and has the following options: long January 2017 $25 calls on American Airlines Group and long January 2016 $60 calls on American Airlines Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.