Quantamental Flying: The U.S. Global Investors JETS ETF

The Wealth Advisor Contributor

August 30, 2024

In a recent interview with Wealth Advisor Managing Editor Scott Martin, Frank Holmes, CEO and CIO of U.S. Global Investors, shared his insights on the current state of the airline industry and the performance of the U.S. Global Jets ETF (NYSE: JETS). As the creator of this thematic ETF, Holmes offers a unique perspective on the sector’s recovery and future prospects.

Despite ongoing concerns about the global economy, the airline industry is experiencing a significant resurgence. Holmes points out that the sector is not just recovering from the COVID-19 pandemic but is entering a new boom phase. The industry, valued at more than $1 trillion, is seeing record global travel numbers across various segments.

Key statistics support this trend:

The International Air Transport Association (IATA) projects industry profits of $30 billion this year, up from $27 billion previously.
Passenger numbers are at an all-time high, with 5 billion out of the world’s 8 billion people expected to travel this year.
Tourism revenue is up 9% from the previous year.
Global business travel has surged, projected to reach
$1.5 trillion, up from $1 trillion two years ago.

Long-Term Growth Projections

Holmes emphasizes the long-term growth potential of the airline industry. According to IATA forecasts, world passenger growth is expected to increase from 5 billion to 9 billion by 2043, implying an annual growth rate of nearly 4%. This projection not only bodes well for airlines but also suggests optimism for the overall global economy.

The ripple effects of this growth extend far beyond the airline industry itself. As demand for air travel surges, aircraft manufacturers like Boeing and Airbus are seeing a significant uptick in orders for new planes. This boom isn’t just limited to the skies; on the ground, airports worldwide are undergoing necessary upgrades and expansions to accommodate the increasing flow of passengers.

The impact on employment is equally impressive, with job creation spreading across a wide range of sectors related to air travel and tourism. From pilots and flight attendants to ground crew and hospitality workers, the industry’s growth is opening up new opportunities across the board.

The JETS ETF: A Unique Approach to Airline Investing

For investors looking to capitalize on this industry-wide growth, the U.S. Global JETS ETF offers a compelling option. This fund provides targeted exposure to the airline industry through a sophisticated investment strategy. At the heart of JETS is what Holmes calls a “quantamental” approach—a hybrid method that marries the precision of quantitative analysis with the nuanced insights of fundamental stock picking.

But what truly sets JETS apart is its comprehensive view of the airline industry. While its primary focus is on U.S. carriers, the ETF doesn’t stop at national borders. It extends its reach to include international airlines and even airport operators, providing investors with a truly global perspective on the industry. This global outlook is balanced by a smart allocation strategy: about 70% of the fund’s holdings are in domestic companies, ensuring a strong foundation in the robust U.S. market.

The fund’s investment strategy goes beyond simple stock selection. JETS employs a Smart Beta 2.0 approach, utilizing a combination of factors to identify promising investments and construct its portfolio. This method allows the fund to adapt to the dynamic nature of the airline industry, potentially capturing opportunities that more traditional investment approaches might miss.

Recognizing that the airline industry is subject to rapid changes and global events, U.S. Global Investors actively monitors its JETS ETF. The fund undergoes a quarterly rebalancing process, allowing it to maintain its strategic allocations and adjust to evolving market conditions. This regular fine-tuning helps ensure that the fund remains aligned with its investment objectives and responsive to the ever-changing landscape of global air travel.

Through this multifaceted approach, JETS offers investors a unique way to participate in the growth of the airline industry—one that combines domestic strength, international reach, and a sophisticated investment strategy designed to navigate the complex world of air travel.

Portfolio Construction and Strategy

The JETS ETF’s portfolio is meticulously designed to reflect the complex dynamics of the airline industry. At its core, the fund allocates 40% of its assets to the four major U.S. airlines that dominate domestic travel, accounting for 65% of the market.

Each of these industry giants is given equal weight, claiming a 10% stake in the portfolio. This strategic focus on key players ensures the ETF captures the pulse of the American aviation sector.

Beyond these cornerstone investments, JETS casts a wider net to encompass the global aviation landscape. The remaining portion of the portfolio is divided among 40 carefully selected companies, each representing a unique facet of the industry.

Twenty of these firms are allotted a 1% share, while another 20 are given a 0.5% allocation. This broader diversification not only spreads risk but also provides investors with exposure to a rich tapestry of international airline stocks and related businesses.

The ETF’s strategy is further refined by incorporating both mean reversion and momentum factors in its stock-selection process. For the core holdings, the fund leverages mean reversion principles, capitalizing on the cyclical nature of the airline industry.

Meanwhile, the broader selections are influenced by momentum factors, allowing the portfolio to adapt to emerging trends and opportunities in the global aviation market. This dual approach aims to balance stability with growth potential, offering investors a comprehensive representation of the ever-evolving airline sector.

Current Market Dynamics and Opportunities

Holmes identifies several factors the airline industry is navigating in a complex landscape of opportunities and challenges, all of which have significant implications for the JETS ETF. At the forefront is the post-pandemic travel boom, with people eagerly making up for lost time by prioritizing experiences they missed during lockdowns. This surge in leisure travel is complemented by a robust resurgence in business travel, which, despite broader economic uncertainties, is bouncing back strongly and contributing significantly to industry revenues.

Behind the scenes, airlines are embracing technological advancements, pouring resources into AI and other cutting-edge technologies. These investments aim to streamline operations and enhance customer experiences, with a particular focus on perennial pain points such as baggage handling.

However, the industry’s rapid recovery is not without its hurdles. Airlines are grappling with supply constraints as they struggle to meet the surging demand, facing limitations in both aircraft production and airport capacity.

Interestingly, while some global economic indicators hint at a potential slowdown, the travel sector seems to be charting its own course. It remains remarkably robust, defying broader economic trends and painting a picture of an industry that’s not just recovering, but thriving in the face of adversity. This resilience underscores the unique position of the airline industry in the global economy and highlights the potential opportunities for investors in vehicles such as the JETS ETF.

Investment Considerations for Advisors

For financial advisors and broker-dealers considering the JETS ETF, Holmes offers several insights:

Sector Allocation: A 5% to 10% portfolio allocation to airlines through JETS could provide exposure to global economic trends.
Oil Price Correlation: The 50-day moving average of oil prices serves as a short-term indicator for airline stock performance. Lower oil prices typically benefit airlines due to reduced fuel costs.
Diversification Tool: JETS can serve as both a sector-specific play and a diversifier in broader portfolios.
Economic Barometer: Airline industry performance can be viewed as an indicator of overall economic health and consumer confidence.

Challenges and Risks

While the outlook for the airline industry is generally positive, potential challenges merit consideration: Despite strong travel demand, broader economic slowdowns could impact the industry, particularly in business travel. In addition, as a significant cost component, fuel price volatility dependent on fluctuations in oil prices can materially affect airline profitability.

More broadly, geopolitical factors and the regulatory environment can prove challenging. International tensions or conflicts can disrupt global travel patterns, and changes in aviation regulations or environmental policies could impact operational costs and strategies.

Looking Ahead

Holmes remains optimistic about the airline industry’s prospects. He anticipates that potential interest rate cuts and fiscal stimulus measures could further boost the sector. The combination of strong travel demand, technological advancements, and strategic industry positioning suggests a positive outlook for airlines and the U.S. Global Investors JETS ETF.

For investors and advisors, the airline industry represents a unique opportunity to capitalize on global economic trends and the continued growth of both leisure and business travel. The JETS ETF, with its carefully constructed portfolio and global exposure, offers a way to participate in this sector’s potential upside while managing some of the inherent risks through diversification.

As the world continues to prioritize travel and connectivity, the airline industry stands poised for sustained growth. Whether as a tactical allocation or a long-term holding, exposure to this sector through vehicles such as the JETS ETF may be worth considering for portfolios seeking to capture the ongoing revolution in global mobility.

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