U.S. International Jets ETF: Maintain The Flight To Fly Into This ETF (NYSEARCA:JETS)

Funding Thesis

The airline sector of shares has not had the leisure of having fun with a formidable begin to the yr. The markets moved ~4% greater on common year-to-date, with expertise shares once more main the way in which as they did final yr. However as might be seen within the chart beneath, the basket of airline shares represented by the U.S. International Jets ETF (NYSEARCA:JETS) underperformed the markets.

I imagine a few of that bearish sentiment might have been spurred by stories by many funding banks, resembling this one by Financial institution of America, indicating that shopper discretionary shares might underperform in 2024. To complicate issues, quality control issues in some Boeing 737 Max 9 planes forged a darker cloud on the airline trade. My evaluation exhibits that the profitability outlook for JETS is both priced in on the second and/or uncertainty is weighing down on JETS. In the mean time, I charge this ETF as a maintain till I get a clearer image.

About JETS fund

JETS is an ETF whose belongings are managed by U.S. International Traders. By way of the fund, the agency seeks to supply publicity to corporations concerned within the air journey trade, together with airline operators, airports and terminal companies, and different miscellaneous producers associated to the trade. In line with the fund’s prospectus, belongings are invested in corporations associated to the airline trade with world publicity.

JETS achieves its fund goal by monitoring the U.S. International Jets Index, which is reconstituted on a quarterly foundation. I’ve hooked up a abstract of the fund’s holdings beneath.

Peer comparability

With the intention to spherical out the perception derived from conducting a peer-to-peer evaluation of JETS, I checked out just a few different ETFs that both are inclined to instantly compete with JETS when it comes to belongings or are associated to the broader tourism trade. JETS is positioned as a pure-play airline-focused ETF, however I believe it could even be prudent to take a look at different ETFs within the bigger tourism area somewhat than solely concentrate on JETS. There are some inherent dangers with JETS, which I’ll focus on in a later part. For now, I’ll observe the ETFs beneath and examine them to JETS.

What instantly stands out to me is the expense payment of 0.6% for traders. That is fairly excessive, particularly on condition that JETS is the most important ETF within the shopper discretionary tourism area and can be one of many oldest of the lot. Whereas the ETFMG Journey Tech ETF (AWAY) and the Defiance Resort, Airline, and Cruise ETF (CRUZ) are extra diversified by investing in a mixture of airways, inns, and journey expertise, the SPDR S&P Transportation ETF (XTN) invests in belongings that additionally diversify in direction of areas resembling logistics and industrial transportation.

When it comes to previous efficiency, it’s simpler for me to look at how the pure-play airline worth proposition for JETS doesn’t essentially stand out. Sure, AWAY and CRUZ are new-age ETFs, however since these ETFs have endured the cruel realities of the 2022 bear market, it nonetheless provides me loads of room to check all ETFs over a 3-year interval. I observe how JETS doesn’t essentially stand out in efficiency versus different ETFs. Even in shorter time frames, such because the 1- or 3-month intervals, it’s only capable of etch a smaller lead when it comes to efficiency when in comparison with the smaller CRUZ, which additionally affords a comparatively higher dividend yield.

Macroview for airways trade & JETS is combined

The Worldwide Air Transport Affiliation (IATA), the commerce affiliation for the world’s airways, representing some 300 member organizations, published its FY24 outlook final month. IATA sees the airline trade’s earnings as a complete to extend by 10.3% on a y/y foundation in FY24, pushed by barely higher passenger yields and a file variety of passengers anticipated to fly this yr. 4.7 billion individuals are anticipated to journey globally by airline this yr. This shall be ~8% greater than anticipated world passenger volumes in FY23 and, for the primary time, will beat world passenger volumes in 2019 by ~4.4%. However the commerce affiliation additionally says that profitability will “largely stabilize in 2024” after capping off a strong 2023.

Additional, I additionally noticed that within the U.S., passenger volumes of checks at TSA checkpoints had been already up 8% on a ytd foundation, this yr. Passenger volumes at TSA checkpoints all of a sudden dropped round Thanksgiving final yr however have since stabilized, as seen within the weekly 2024 passenger volumes beneath.

This seems like a great begin to the circulation of passenger volumes within the U.S., which is usually consistent with what the IATA is seeing. In current earnings calls, airways reported seeing sturdy demand proceed into this yr. American Airways’ (AAL) outlook for FY24 remained upbeat. United Airways (UAL) additionally reported a robust close to FY23, though its FY24 projections had been on the market’s estimates. Nonetheless, Delta Air Traces reduce its FY24 outlook (DAL), citing greater enter prices and decrease airfares. To me, these are essential elements as a result of greater enter prices resembling gas and labor prices, along with decrease airfares, will apply strain on the airline corporations which might be a part of JETS’s fund composition.

Assuming the ten.3% y/y earnings that I famous earlier, these revenue margins are nonetheless decrease than the 10.9% expected within the S&P 500 this yr. The S&P 500 is already buying and selling at a ahead PE of 20, which is greater than the 5-year common of 18.9 and above the 10-year common of 17.6. With the airline corporations anticipated to lag the S&P 500 when it comes to earnings, I don’t see any room for upside on this case. Furthermore, there would should be important upward revisions in airfare, at the moment down -9.4% y/y and downward tendencies in hourly wages, at the moment up +4.5% y/y and gas, at the moment down -1.6% (CL1:COM), for me to improve my outlook about this ETF. Furthermore, there are some dangers too, which I’ll cowl within the subsequent part. Given all these developments, I’m at the moment issuing a HOLD on JETS.

Dangers & different elements to think about

The largest danger to investing in JETS is publicity to airline shares. Per the prospectus I shared earlier, ~74% of the fund belongings are invested in airline corporations. Most airline corporations at all times must handle their enter prices whereas delicately utilizing airfares to handle shopper demand. If both of the 2 sides of the equation is imbalanced, it may result in main headwinds for the revenue outlook for airline corporations. I imagine these elements are essential for JETS as a result of most airline corporations carry important debt on their stability sheets because of the excessive capital prices incurred from the acquisition or lease of airplanes. If enter prices, resembling gas or wages, pattern greater, it may very well be detrimental to their revenue outlook. Most lately, I noticed how high quality points with the 737 Max 9 airplanes by Boeing have brought about Alaska Airways and United Airways to downgrade their profitability outlook. The profitability will get impacted resulting from greater enter prices from sudden areas resembling decrease capability, greater cancellation prices, and so forth. United Airways administration talked about on the recent earnings call that “it is going to impact United in the near term because of some of the challenges they’ve had” when requested about Boeing’s Max 9 airplane high quality points.

Furthermore, geopolitical tensions additionally have an effect on corporations within the JETS ETF. For the reason that pandemic, there was a rise in geopolitical tensions world wide, with Russia/Ukraine and Israel/Gaza tensions taking middle stage. Each of those conflicts have created uncertainty amongst vacationers however have additionally pushed up gas prices, which make it tough for airline corporations to function effectively since they drive up their enter gas prices.

Lastly, shopper demand is predicted to stay sturdy this yr as properly. However with the IATA already projecting a file 4.7 billion passenger volumes in FY24 as properly, I imagine most of that progress is already priced into the expansion outlook for airline corporations. Transferring additional, any important improve or downgrade within the outlook for airline corporations will present headwinds and tailwinds, respectively.

Takeaways

After reviewing the JETS ETF, I imagine the circumstances for airways and different corporations as represented by the JETS ETF are priced in for now. There are dangers that also persist, and the Boeing Max 9 points that I talked about earlier have created one other quality-control headache for a lot of airways which might be a part of the JETS ETF. Nonetheless, if the macro outlook for the buyer continues to get higher, it could present the required increase for the JETS ETF. With uncertainty nonetheless persisting and the outlook for the yr priced in, I charge this ETF as a HOLD.