Airline stocks have been a favorite of many analysts as the economy resumed reopening and restrictions eased. Is it too late to join the party? If not, which ETFs should be considered?
When this blog analyzed opportunities in specific industries such as banks or sectors such as consumer staples, I compared representative ETFs before identifying similarities and differences. However, in reviewing which ETFs should be considered to make a short-to-medium term allocation to the airline industry, I was surprised to find that there is only one. It is called JETS which is also its ticker symbol. It has between 3 and 4 billion dollars in assets which is certainly substantial and competitive with others profiled in this space. It was launched in April 2015 by U.S. Global Investors (GROW), an innovative multi-faceted investment company that has only one other US-listed ETF.
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There are exactly two Transportation Sector ETFs, the SPDR Select Transportation Sector ETF (XTN) and the iShares Transportation Average ETF (IYT). Both have less than 20% of their portfolios allocated to airline stocks with the greatest allocation of XTN in the trucking industry while IYT’s largest holdings are dominated by railroads. Both are index funds based on indexes calculated by S&P Dow Jones indexes. XTN, is a Select Sector SPDR from State Street Global Advisors. As such, all of its stocks are in the S&P 500 and in the transportation industry. IYT is from iShares by BlackRock and is based upon a modified version of the Dow Jones Transportation Index. These two ETFs are the closest alternatives for a tactical opportunity that includes airline stocks. Interestingly, both are rated 4 which is above average for timeliness by ValuEngine’s models.
Analyzing JETS presented a major challenge. More than half of its 51 holdings are airlines, air transport and airport holding companies whose primary stock listings are outside of North America, a major reason that the ETF is not rated by ValuEngine. However, its daily holdings are available on the ETF’s website and its top ten, constituting more than 55% of its current portfolio, are all rated by ValuEngine. These holdings are: Delta (10%); United (10%); Southwest (10%); American (10%); Alaskan Air (3%); Sun Country (3%); Allegiant (3%); JetBlue (3%); SkyWest (3%) and Air Canada (3%). All 10 are weighted at least a 3 (average) by ValuEngine. Four of 10 including: United, Sun Country, Allegiant and Jet Blue are rated 4 (above average) while Delta, American and Air Canada are all rated 5 (highest). Taken together, these ratings infer that JETS would probably get about the same current rating of a 4 out of 5 as a timely investment from ValuEngine’s models as XTN and IYT. This is above average as an ETF to buy now. The rest of the information needed for the comparison tables were gathered from JETS’ Factsheet, Summary Prospectus and website.
The following table provides much of the pertinent information available as of August 27, 2021. IVV, the iShares S&P 500 ETF, is used for benchmarking.
| JETS | XTN | IYT | IVV | |
| ValuEngine Rating | Not Rated | 4 | 4 | 3 |
| 1-Yr Forecast Return | N/A | -2.1% | -1.8% | -3.4% |
| 6-Month
Historical Return |
7.22% | 3.51% | 9.17% | 13.74% |
| 1-Yr Historical Return | 48.34% | 42.09% | 29.29% | 29.29% |
| 3-Yr Historical Return | -9.34% | 7.04% | 7.09% | 15.67% |
| 5-Yr Historical Return | 1.14% | 13.34% | 13.23% | 14.28% |
| Volatility | 32.8% | 24.9% | 21.8% | 15.1% |
| Sharpe Ratio | 0.03 | 0.56 | 0.61 | 0.94 |
| Correlation with S&P 500 Index | 0.71 | 0.85 | 0.85 | 1.00 |
| # of Stocks | 51 | 47 | 46 | 500 |
| % Labeled
Undervalued by VE |
N/A | 53 | 54% | 36% |
| Beta | 1.82 | 1.43 | 1.26 | 1.00 |
| Alpha | -0.08 | 0.01 | 0.06 | 0.00 |
| P/B Ratio | 3.7 | 1.7 | 1.3 | 4.7 |
| P/E Ratio | NEGATIVE | 13.0 | 12.1 | 33.6 |
| Div. Yield | 0.0% | 1.2% | 0.7% | 1.2% |
| Expense Ratio | 0.60% | 0.25% | 0.35% | 0.03% |
| Index Provider | US Global Investors | S&P Dow Jones
Indexes |
S&P Dow Jones
Indexes |
S&P Dow Jones
Indexes |
| Index
Scheme |
Fundamentally Modified Cap Weighting | Mkt. Cap Weighting | Modified Equal Weighting | Mkt. Cap Weighting |
| ETF Sponsor | US Global Investors | SPDR by SSgA | iShares by Blackrock | iShares by Blackrock |
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Salient observations we can make:
- JETS outperformed XTN, IYT and IVV during the past 12 months
- JETS has far more volatility than the other three ETFs. Such volatility is often desired for hedge fund trading strategies but not for medium-term to long-term investors.
- JETS has the lowest correlation with the S&P 500 Index, this is also a highly desired feature for a trading strategy and a tactical satellite holding because it may perform much differently from the benchmark index on a given day, week or month. This is needed to implement a differentiated tactical strategy
- For the prior three- and five-year periods, JETS badly underperformed XTN, IYT and IVV and did so with significantly more volatility and a significantly higher Beta. This reflects the “feast-or-famine” nature of investing in airline stocks.
- JETS pays no dividends, has negative earnings resulting in a negative P/E Ratio and a Price/Book ratio more than double that of XTN and IYT. Therefore. JETS cannot be considered a value play in any sense.
- Since roughly 42% of its portfolio is invested in stocks that have their primary listings in other country, there is substantial embedded currency risk whether JETS is using the foreign-listing stocks or its American Depository Receipts (ADRs).
- With a correlation of 0.956, IYT and XTN are much closer to each other than either is to JETS on one extreme and to the S&P 500 on the other. That said there are differences.
- IYT has a higher year-ahead forecast returns while both IYT and XTN have forecasted returns that are not as negative as the -3.4%
- IYT also ranks better than XTN on 6-month historical return while having less volatility and lower Price/Book and Price/Earnings ratios.
- Alternatively, XTN performed much better than IYT and S&P 500-based IVV during the past 12 months and has an almost identical dividend yield with IVV. Both have a dividend yield close to double that of IYT. XTN is also 10 basis points less expensive than IYT with an expense ratio of 0.25%
The analysis concludes that JETS is too speculative for investment strategies and is much more appropriate for short-term trading strategies. Two of the four airline stocks, American Airlines (AAL) and Delta Airlines (DAL) have ValuEngine’s highest rating of 5. Fans of airline stocks may be better off eschewing the JETS ETF in favor of a small tactical allocation to these two stocks as much more transparency is available. Their ValuEngine stock reports provide a great amount of underlying information and analytics, simplifying the analytic process.
Alternatively, the two transportation industry ETFs, XTN and IYT, are both worthy candidates currently for evaluation as smaller tactical allocations to supplement core holdings. Although somewhat more expensive, IYT has slightly more positive differentiating factors and is my top choice by a very thin margin. Another sensible and more diversified approach is allocating 50% apiece to XTN and IYT.
So, the answer the title question is that it depends on your objectives and your tolerance for volatility. Sophisticated hedge fund and institutional volatility traders may well wish to add JETS to their arsenal. In my opinion, JETS is too speculative and analytically complex for investors, even as a short-term deployment tool.
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For end investors and their advisors using a core-satellite approach to take advantage of cyclical opportunities when available, a more prudent path is allocating to the broad transportation sector that includes railroads, trucking and logistics firms together with airlines. Deciding between the Select Sector Transportation SPDR, XTN and the Dow Jones Transportation based ETF sponsored by iShares is a tough task for me.
Since tactical allocations are a function of timing, I lean towards IYT. It’s forecasted year-ahead return is less negative and its six-month momentum is superior. The higher Sharpe ratio, lower Beta and better Price/Book and Price/Earnings ratios are also compelling. Closely correlated XTN is also not a bad choice. It has a lower expense ratio and a higher dividend yield. Once again, the superior choice is a function of investor objective. Income-sensitive and/or fee-sensitive investors should favor XTN. Investors focused on the best potential return-per-unit-risk ratio should prefer IYT.
Herb Blank
Senior Quantitative Analyst
ValuEngine, Inc
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