There is now an exchange-traded fund (ETF) tracking airline stocks. Launched in January, it is called the Claymore/NYSE Arca Airline ETF (NYSEARCA:FAA). The annual expense ratio is 0.65%.
Legendary investor Jim Rogers recently told reporters he is bullish on the airline industry. The many bankruptcies, cutbacks, and mergers are a sign of a bottom, he says. The industry has cleaned up the overcapacity problem that has made it such a bad investment over the last 10 years (during which the AMEX Airline Index has lost 90% of its value).
Meanwhile, the plunge in oil prices has lowered fuel costs substantially. One analyst estimates that the top ten airlines will save about $20 billion (US) in 2009, which more than offsets the $6- to $8-billion (US) hit to revenues expected from the recession.
Companies are admitted into the Claymore/NYSE Arca Airline ETF if they have at least half their sales from flying passengers, a market capitalization greater than $100 million (US) and daily trading volumes averaging at least $1 million (US) a day. On this basis, 25 companies presently make it into the ETF.
The weighting formula starts off with a 70% allocation to U.S. stocks and 30% to non-U.S. stocks. The top three U.S. carriers (by market cap), Continental, Southwest, and AMR, each get 15%. The top three international carriers, Lufthansa, Singapore Airlines and Air France, get 4.5% each. Rebalancing is done quarterly.
This will be a volatile ETF. Still, there is potential for more than a doubling in value. Maybe it could be a pick for the aggressive investor with a mad-money portfolio in or outside a TFSA?