Franks Holmes kicks off world's first aviation ETF
I guess, when you’re a jet, you’re a jet all the way.
This from Frank Holmes, CEO of US Global Investors and creator of the new JETS Airline ETF, the only airline ETF in the world.
JETS is 80% weighted to US airlines, but it also owns aircraft manufacturers, airports and terminal services companies globally. The index charges 60 basis points annually and rebalances quarterly based on several criteria. These include market cap and load factor, a measurement of an airline’s efficiency.
The idea for JETS came to Texas-based Mr. Holmes, a perennial natural resources asset manager, during one of about 100 flights the executive took last year. He was impressed with service from Alaska Airlines before analyzing the company’s numbers and witnessing impressive cash flow growth.
His US Global in San Antonio bought Alaska stock soon after and it has since doubled.
Mr. Holmes says the airline industry has more growth ahead of it for several reasons, not least of which includes cheap oil prices. The airlines turned a major corner in profitability recently thanks to consolidation and a reduction in offerings, premium pricing, smaller seats and better technology.
“The first quarter of 2015, pre-tax profit for the total airline industry went from $700 million a year ago to $3.5 billion,” Mr. Holmes commented. “You’re talking about $15 billion a year in new cash flow and it only trades at 9x earnings.”
Airlines are the cheapest stocks in the transportation sector, according to Holmes. He says trucks and train companies are trading for about 19x earnings currently, despite more modest growth compared to the airlines.
Holmes also says a pilot shortage should be good for airline stocks, with wages not justifying the current cost of flight training. There are fewer pilots coming from the military as well, Holmes says, noting that drone pilots do not have the necessary flying experience for commercial airliners.
Investors in JETS will need to be sensitive to oil price volatility. “The only negative would be if oil prices jump to $100 in a quick pace,” Mr. Holmes concedes. “JETS is a great counterweight to oil prices. The other airlines are all hedging, but American doesn’t.”
JETS is the first ETF by US Global Investors (GROW on NASDAQ), an asset management firm led by Mr. Holmes since 1989 with expertise in precious metals, natural resources and emerging markets.
“The mutual fund industry is being Uberized,” Holmes says. “Very few new mutual funds are being created, everything is going to Exchange Traded Funds (ETFs).”
Holmes prefers “smart beta ETFs” like JETS, which he says use sales growth, cash return, gross margins and other profit metrics.
US Global backtested several theoretical smart ETF indexes for the natural resources industry. The backtesting shows that returns of smart beta ETFs would have trounced individual portfolio managers had they existed during the previous commodities cycle.
Look for US Global to develop other ETFs, including in the natural resources space.
Launching the new JETS ETF has cost US Global about $1 million and Holmes says $100 million in assets under management will get it to break-even. He doesn’t anticipate any problems in marketing the new ETF to airline analysts and investors.
“They know airline cashflow is going from negative to positive and this is a huge trend going forward.”
JETS will begin trading on the NYSE this Thursday, April 30. To learn more visit www.usglobaletfs.com.
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— Frank Holmes (@bulldogholmes) April 24, 2015