Airline ETF assets surge as Buffett hits eject button

May 6th, 2020 | By | Category: Equities

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An ETF providing exposure to the global airline industry fell sharply in recent trading after Warren Buffett announced that Berkshire Hathaway had sold its stake in the four biggest US carriers.

US Global Jets Warren Buffett

Warren Buffett has sold his entire stake in the four major US airlines.

The US Global Jets ETF (JETS US), the only pure-play ETF dedicated to the airline industry, declined 4.8% on Monday and another 2.5% on Tuesday.

Delta Air Lines, Southwest Airlines, American Airlines, and United Airlines, which collectively make up 48% of JETS’s portfolio at rebalance, were abandoned by Buffett who stated that their businesses had been fundamentally changed by the Covid-19 pandemic.

The departure of its most prominent investor is the latest blow to the airline industry which has seen air travel demand fall off a cliff while companies continue burning through cash on airplane leases, storage hangers, and the maintenance of essential flight routes.

These tough dynamics led the airline industry to feel the full force of the equity market rout earlier this year.

Between 21 February and 23 March, JETS plummeted an astonishing -59.1% compared to -32.7% for the SPDR S&P 500 ETF (SPY US) over the same period.

Complicating matters, the outlook for the sector remains foggy. Demand is only likely to return to normal levels when a vaccine is widely available. In the meantime, some reports suggest that carriers may be required to leave every second airplane seat unoccupied to comply with social distancing rules.

This high level of uncertainty has, thus far, sabotaged the industry’s ability to recover in line with the broader market rally over the past few weeks. Whereas SPY has recouped most of its losses since bottoming out in March, JETS has traded sideways, encountering air pockets after every short climb. The fund is still down -58.5% year-to-date compared to -10.5% for SPY.

Despite the worrying fundamentals, however, JETS has experienced a surge in net inflows over the past two months, raking in $320 million and $300m in net new assets for March and April respectively, and further $35m so far this month.

Assets under management have surged from $35m in late February to almost $600m now. See the chart below (figures in USD).

JETS US AUM ($m)

ETF insiders might speculate that this demand reflects hedge fund investors creating shares to enact short positions as was apparently the case when the United States Oil Fund (USO US) saw a spike in net inflows last month amid crashing oil prices.

However, according to data from IHS Markit, this is not the case. The data provider notes that JETS’s short interest as a percentage of shares outstanding is currently below 3%, having peaked this year at roughly 8% in February.

This, and the timing of the massive expansion in assets under management, coming well after airline stocks had declined, appears to suggest that the ETF is appealing to contrarian, deep-value investors seeking out the industry’s bottom.

It seems they’ve taken the Buffett adage to heart: “Be fearful when others are greedy and greedy when others are fearful”.

But whether these investors have outsmarted the Oracle of Omaha remains to be seen. US airlines have benefitted from sizable grants issued by Congress, although these funds are meant to be used for employee compensation. The firms have also fortified their balance sheets by issuing a record level of debt, reportedly finding investor enthusiasm for their bonds remains robust.

For investors in the ETF, they’ll be hoping these measures provide the airline industry with enough fuel to weather the rest of the storm.

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