Long Airlines, Short Oil Working With ETFs


A familiar trade is working once again; that being long airline stocks and short oil. The numbers back up that assertion, as over the past month, the Guggenheim Airline ETF (NYSE:FAA), the only ETF devoted to airline stocks, is up half a percent. That may not sound like much, but a pair trade involving a long position in FAA and a short position in a futures-based oil ETF has certainly worked over the past 30 days.

Over that time, the PowerShares DB Oil Fund (NYSE:DBO) has slid 7.1 percent while the U.S. Oil Fund (NYSE:USO) is off 9.1 percent. Lower oil prices clearly benefit airlines because every for every $1 oil rises, the cost to the global airline business is $1.6 billion.

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"In terms of Airlines and their corresponding stocks, something that often comes up in conversation and analysis is the price of oil," said Street One Financial Market Technician David Chojnacki in a research note. "The cost of fuel oil is clearly a pivotal part of the equation in the overall profitability of any given airline company, and the companies themselves often have hedging costs associated with controlling the potential rise of oil prices over time. Granted, lower oil prices are desirable for airlines, as they are for consumers whom rely on automobile transportation, trucking companies, and anyone else whom is relying on oil as their main source of fuel."

On a year-to-date basis, the advantage of declining oil prices to FAA is even more pronounced. The ETF, which debuted in January 2009 and now has almost $15.1 million in assets under management, is up nearly 14 percent while DBO and USO are down 9.6 percent and 12.2 percent, respectively.

"This inverse correlation is likely not a coincidence based on the general logic of the linkages in oil prices and Airline profitability as mapped out above. Since inception in 2009, FAA has risen 41.59% with DBO increasing 36.50% during the same time frame," Chojnacki said.

FAA holds 26 stocks, has a price-to-earnings ratio of 14.2, a price-to-book ratio of one and a beta of one against, according to Guggenheim data. The fund allocates 69.6 percent of its weight to U.S.-based carriers. Delta (NYSE:DAL), United Continental (NYSE:UAL) and Southwest (NYSE:LUV) combine for about 45 percent of the fund's weight. On that basis alone, short-term traders will want to keep an eye on FAA as Southwest reports earnings on October 18. Delta and United follow on October 24 and 25.

Those earnings reports could go a long way toward determining FAA's near-term fate. The ETF was recently rebuffed at resistance around $31 and there is another issue to consider. Equity-based oil ETFs have also been tumbling recently, but data from Street One points out buyers are creeping back into some of these funds. Over the past weel, the Energy Select Sector SPDR (NYSE:XLE) was the leading ETF in terms of new creations at about $277.5 million in inflows while the SPDR S&P Oil & Gas Explanation & Production ETF (NYSE:XOP) was third with about $247 million in inflows, according to Index Universe data.

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