The U.S. Global Jets ETF (JETS) impressed last year, soaring even as oil finished 2016 as one of the year's best-performing commodities.
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Coach seats still cramp travelers of above-average height and customer service, however in some instances, things are changing for the better when it comes to the airline investment thesis. In fact, one of the biggest stories out of the airline industry last year was that Warren Buffett ended a decades-long aversion to airline stocks.
Rising profits and increased free cash flow make Buffett's recent airline bet, his first in decades, look all the more prescient. In November, it was revealed that Berkshire Hathaway accumulated stakes in three of the top four holdings in JETS. That trio represents about 37 percent of the ETF's lineup.
Despite a less-than-stellar start to 2016, the airline industry has performed incredibly well the past five years, said Morningstar in a recent note. It's up 312% since the end of 2011 versus the S&P 500's gain of 80% during the same period. It used to be a mess of an industry, but consolidation, fewer price wars, improved capacity and better management overall have dramatically improved performance--and returns. Yet, airline stocks, in general, are still highly sensitive to specific market factors.
The underlying index for JETS, the U.S. Global Jets Index, uses a smart beta strategy to track the global airline industry. The index uses fundamental screens to determine the most efficient airline companies according to US Global.
Southwest Airlines Co. (LUV), United Continental Holdings (UAL), Delta Airlines Inc. (DAL) and American Airlines Group Inc. (AAL) are the top four holdings in JETS, combining for about 48 percent of the ETF's weight.
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Airline companies are also generating billions of dollars on nonticket sales revenues. In 2015, these businesses made a collective $41 billion in extra fees and charges, such as checked bag and seat selection. That could rise as the big players start competing more with low cost carriers, adds Morningstar.
Airlines trade at 11 to 13 times this year's expected earnings, according to Morningstar, which is less expensive than the broader industrial sector.
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