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Airline ETF Set to Soar on Busiest Labor Day Travel

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Thanks to a strong economy, low unemployment and relatively low fares, last-minute trips during the Labor Day holiday are palpably more this time than any year. This is especially true given that air travel is poised to hit another record with 16.1 million passengers expected to fly over the seven-day Labor Day holiday (Aug 30 to Sep 5), up 5% from last year, per the report from U.S. airlines group, Airlines for America (read: ETFs & Stocks to Gain Height on Busy Air Summer Travel).

In order to accommodate higher travel demand, U.S. airlines increased the number of seats available for their late summer getaway by about 133,000. The addition of capacity will fuel traffic numbers as industry capacity is at its highest since 2007.

The busiest travel day of the weekend is projected to be Sep 1 followed by Aug 31 and Sep 4 while Hartsfield-Jackson International in Atlanta, LAX in Los Angeles and O’Hare International in Chicago will likely be the most active U.S. airports.

However, this Labor Day holiday might not as cheap as it was last two years. Gasoline prices at pumps in some states have increased due to Hurricane Harvey. Analysts had expected about a 10% jump in prices, but the forecasts were revised up as worries over supply shortage increased. Nearly one-third of U.S. refining output was affected by Harvey and its extreme rainfall and flooding. Per CNBC, drivers could have to pay as much as $2.60 per gallon nationally during summer’s last big travel weekend (read: Gasoline ETF Jumps on Storm Harvey).

That said, investors seeking to tap huge air travel demand during the Labor Day weekend should focus on the airline ETF — U.S. Global Jets ETF (JETS - Free Report) .

JETS in Focus

This fund provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. In total, the product holds 34 securities and is heavily concentrated on the top four firms — American Airlines (AAL - Free Report) , Delta Airlines (DAL - Free Report) , Southwest Airlines (LUV - Free Report) and United Continental Holdings (UAL - Free Report) . These account for at least 11% share each while other firms hold less than 4% share.

In terms of regional exposure, North America accounts for 78% of JETS, followed by Europe at 11%. Other regions like Asia-Pacific, Asia, Latin America and Middle East make up for a low single-digits in the portfolio (read: Hurricane Harvey Puts These ETF Areas in Focus).

The fund has gathered $115.4 million in its asset base while sees moderate trading volume of nearly 61,000 shares a day. It charges investors 60 bps in annual fees and has gained 2.9% so far this year. JETS has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

What Lies Ahead?

Not only will strong Labor Day weekend travel fuel growth in JETS, the month of September is historically kind to the ETF given the outperformance of some of the big holdings in the portfolio. Per Schaeffer's Investment Research, Delta Airlines has finished higher 70% of the time with an average gain of 6% over the past 10 Septembers while United Continental has finished to the upside nearly two-thirds of the time over the last 11 Septembers with an average gain of 5.1%. Both stocks account for a combined 22.3% share.

Additionally, the International Air Transport Association expects another solid year of performance for the airline industry, suggesting good tidings for the stocks and ETF. It expects global airlines to post $31.4 billion in profits this year buoyed by stronger demand in both cargo and passenger business. However, it is well below the 2016 profit of $34.8 billion. As such, airlines are expected to retain net profit of $7.69 per passenger, down from $9.13 in 2016 and $10.08 in 2015 (read: What Lies Ahead of Leisure & Travel ETFs in 2H?).

Cargo demand is expected to grow 7.5%, more than double 3.6% growth seen in 2016 while passenger demand is expected to grow 7.4%, the same as that of 2016.

Regionally, North American carriers continue to be the “powerhouse of industry profitability” with expected profits of $15.4 billion and accounts for more than half of the global industry profit. European and Asia-Pacific carriers would add $7.4 billion each to the industry profit. Latin America and Middle East carriers are expected to earn $800 million and $400 million respectively, but airlines in Africa are expected to post a $100 million loss.

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