Earlier in June, InvestorPlace contributor Matt McCall suggested that investors shouldn’t be tempted by the U.S. Global Jets ETF (NYSEARCA:JETS) because the airline industry is in for a long and painful ride.
It’s an argument that’s hard to question, especially when it appears America is about to see a return of further community lockdowns as the novel coronavirus spreads.
Much of what McCall says in his article is the stuff many of us have written about in recent weeks. Business is bleak.
Earnings Are Going to Suck
“Consider that Q2 only has a few weeks left and investors will realize that the quarter is pretty much a lost cause. Q3 will have low traffic, too, at least initially. As Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), and others continue to burn cash, the financial strain won’t go unnoticed, even though these companies will avoid going belly up,” McCall wrote on June 4.
He’s 100% correct. Investors are looking way ahead with their bets on airlines, forgetting that the future doesn’t come if their investment enters Chapter 11.
However, where I disagree with McCall has to do with his assessment of the ETFs holdings. He believes the quality of the airlines in the top holdings makes it a less attractive investment.
McCall’s correct that Southwest is the cream of the crop in the airline industry. However, I would not put Delta in the same category. It grew its earnings in recent years on the back of an aging fleet and through the magic of share repurchases. Delta’s got a lot more in common with American Airlines (NASDAQ:AAL) and United Airlines (NASDAQ:UAL) than he realizes.
JETS ETF Composition
In a perfect world, I would prefer that JETS was an equal-weighted ETF where the biggest isn’t at the front of the bus. Let each holding’s quarterly performance speak for itself. A problem with cap-weighted ETFs is that they often turn out to be nothing more than a bet on one or two stocks, which defeats the purpose of owning a portfolio of stocks.
Take the Vanguard Consumer Discretionary ETF (NYSEARCA:VCR). That isn’t a bet on consumer discretionary stocks; it’s a bet on Amazon (NASDAQ:AMZN), which accounts for 21.21% of the ETFs portfolio. The Fidelity MSCI Consumer Discretionary ETF (NYSEARCA:FDIS) is even worse. Amazon accounts for 33.65% of the portfolio. The second-largest holding, Home Depot (NYSE:HD), has a weighting of 7.8%, one-quarter the weighting of Amazon.
In the case of JETS, America’s top four airlines: Southwest, Delta, United, and American account for 10.42%, 9.93%, 9.65%, and 8.66%, of the portfolio, respectively. They are the top four holdings in JETS. Eight out of the top 10 holdings are airlines.
The top 10 holdings account for 61% of the ETFs $1.2 billion in total assets. The ETFs 30 other holdings account for the remaining 39%.
I don’t think you could draw up a better game plan for somebody looking to benefit from a resurgence in air travel than to buy some shares of JETS. Millennials might do some dumb things — who doesn’t? — but buying JETS is not one of them if, and it’s a big if, their reason for doing so is they believe air travel will eventually return to normal, historical volumes.
Who benefits most from a return to regular air travel? The airlines and related industries, such as hospitality and manufacturing.
Now, if you think airline travel won’t ever return to past volumes because of the pandemic, then JETS probably isn’t any better investment than buying Southwest, which I believe is the best of the bunch.
The Bottom Line
I continue to believe that the good times in the markets we’ve experienced since late March likely are going to come to an end with another painful correction like the one we saw in March. I don’t have a crystal ball. I don’t know when it will happen. Maybe it won’t.
However, I believe the JETS ETF has managed to grow to $1 billion+ in assets in 2020, precisely because it was designed for just this type of scenario.
I still believe the airline stocks are a risk, but if you’re going to make a bet on their rebounding at some point, JETS is unquestionably the smart way to play it.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.