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This airline ETF is defying pandemic turbulence

Airlines face their worst year on record, so why would contrarian investors put $2 billion into an aviation industry ETF?

Air travel is forecast to fall 85 per cent this year and global airlines will lose a collective US$84 billion, according to the International Air Transport Association (IATA).

IATA also predicts passenger traffic will not return to 2019 levels for another four years, in 2024. That sobering outlook might push the airline industry to the bottom of everyone’s investing shortlist.

But since March, a group of contrarians have added more than US $2 billion to the only North American-traded airline ETF, betting on a turn around that is sooner rather than later.

“There’s never been a phenomenon quite like it,” admits Frank Holmes, CEO of US Global Investors Inc., based in San Antonio, Texas.

His company manages the US Global Jets ETF (JETS- A). In the midst of industry damage on a previously unimaginable scale, the ETF has had an extraordinary year. It lost two-thirds of its value between January and March and thereafter grew 60-fold to US $2.3 billion as of Nov. 16.

The ETF largely holds airlines, including Air Canada (TSX:AC) and Cargojet (TSX:CJT) which make up 7.5% of the fund. It also holds airports in Mexico, Thailand and Switzerland, an in-flight catering company and air-traffic control and ground-services companies.

In an interview, Mr. Holmes talked about the fund and the industry’s prospects. He believes that for investors with patience and who can withstand turbulence, airlines are a good long-term value proposition.

Mr. Holmes grew up in Toronto’s Cabbagetown neighbourhood, studied economics at the then University of Western Ontario and moved to Texas in 1990 to head up US Global.

Frank Holmes is CEO and Chief Investment Officer at US Global ETFs. Credit: Supplied photo

Q: What is the investment appeal of the airline industry?
A: Research shows that after every major global economic scare, airlines pop back quickly. If you go back to the terrorist attacks of Sept 11, 2001, a year later airline stocks were up 80 per cent from their lows. If you look at the SARS outbreak in Asia, airline stocks were up 120 per cent from their lows a year later. If you look at [global financial crisis of] 2008 – 2009, six months after the March lows they were up 80 per cent.

Isn’t this downturn different?
Yes, you need patience. You tend to get three or four waves of recovery. In previous cycles from trough to peak, we’ve had three to four waves for airlines. You went up 50 per cent and pulled back 15 per cent. You went up 50 per cent and fell back another 15 per cent.

This time, the first big surge was in June, then a correction. Then we had a second big surge and now it’s going sideways with COVID-19 cases rising again.

So why are you optimistic?
There is a lot of positive emotional sentiment because of the vaccine news. So, I’m betting on growth in the global economy. Delta Airlines and Southwest Airlines say their cash burn rate is down dramatically and they expect to be break even by the first quarter of 2021. In the U.S., there is going to be a bias towards positive news as Joe Biden takes over as the president.

It has certainly been a wild ride for JETS this year.
Absolutely, unequivocally. At the beginning of March, 2 million people a day were flying from U.S. airports. By April 14, it was less than 90,000 people – about 4% of that.

In January, our fund was worth about US $50 million. By the first week of March it was under $35 million. Then at the bottom in April, money started coming in and it soared. It’s $2.3 billion now.

What was going on?
It was a phenomenon I hadn’t seen for 30 years, since baby boomers discovered mutual funds. It started with millennials. These young people like to travel.

They know all the best airlines; which ones have the best tickets prices and at what times. While they were stuck at home they experienced society by investing. They were coming in through discount brokers like Robin Hood Markets which allows you to buy stock in small lots – $500 or $1,000 at a time.

They were followed by bigger players, contrarian, tactical investors who saw an opportunity. This was happening in May and June just as Warren Buffett was liquidating his stake in airline stocks, saying it was a mistake. A week after he sold, by the way, airlines surged.

Why did you launch the JETS?
In 2014, I was traveling frequently and noticed my options for flying from A to B had dropped and the cost of tickets was rising.

A lot of airlines were coming out of bankruptcy protection and introducing fees – charging for bags, or to change a ticket or for food on a flight. These fees were significant. It seemed like an opportunity.

How did you design the ETF?
We built a model to capture the bulk of the U.S. domestic market and then allow for expansion.

About 40% of the portfolio is four airlines – what we call the four pillars – because they carry 65% of all passenger traffic in America. Southwest, United Airlines, Delta and American Airlines. At the beginning they were 48% of the ETF, but we’ve diversified.

Who is this ETF suitable for?
It was designed for growth at a reasonable price investors (GARP). It still is. Compared to other industrial industries, airlines are still cheaper than railways and trucking businesses. But you have to be patient and you’ve got to believe people will start flying again. A vaccine may be available sooner than anyone expected, which is highly supportive of airlines.

This is an edited and expanded version of an that article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Nov. 30, 2020.

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