Many investors have likely heard of the “revenge travel” narrative that has taken hold since COVID restrictions began to ease. Revenge travel refers to people who were constrained from traveling for several years during the pandemic and are now making up for lost time by traveling more than usual. Airline stocks are, in turn, staging a “revenge rally” of their own. The U.S. Global Jets ETF (NYSEARCA:JETS) closed off the first half of 2023 with an impressive 27% year-to-date return.
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However, JETS might not be done soaring yet. So, let’s delve into the JETS ETF and explore the reasons behind its rally and its potential for further growth.
Demand Drivers
Why are airline stocks flying to new highs? For one thing, many pundits have spoken about an element of revenge travel, and data seems to back up this sentiment. Airlines 4 America (A4A) estimates that “approximately 257 million people will travel on U.S. commercial airlines” this summer, which would represent a 9.5% increase year-over-year and set a new record by exceeding pre-COVID 2019 levels by about two million passengers.
Secondly, while corporate travel is facing headwinds in the aftermath of the pandemic and the ensuing rise of remote work, the new, more flexible hybrid work schedules that some people have are enabling them to engage in more leisure travel. In a recent interview with CNBC, JPMorgan senior airlines analyst Jamie Baker explained, “Former road warriors like myself who aren’t traveling as much on our company’s dime are spending 50% more on leisure travel because of the workplace flexibility that we have.”
While there is a lot of talk of a looming recession and people struggling with a higher cost of living, a new paradigm seems to be emerging, and it may help airlines to mitigate these factors. At Delta Air Lines’ recent investor day, the company reported that “high income” consumers now drive 75% of air travel demand.
Not only that, but their collective wealth has grown by an astounding $27 trillion since 2019. So while people in the lower half of the economic spectrum don’t have as much disposable income to travel, those that do are spending even more on travel.
These are also the consumers that are the least likely to see their spending power fall during a recession, which bodes well for airlines. Delta CEO Ed Bastian alluded to this at Delta’s recent analyst day, saying that while “everyone is worried about the consumer, our customer is quite strong.”
For a variety of factors, people are traveling and spending on travel as much as ever, and airline stocks, as well as the JETS ETF, are clear beneficiaries.
JETS’ Portfolio
JETS is a $1.7 billion ETF from U.S. Global Investors that invests in the U.S. Global Jets Index, which tracks the “global airline industry, including commercial airlines, aircraft manufacturers, airport operators, and the internet media and services related to airlines,” according to JETS’ factsheet.
It holds 50 stocks, and it’s fairly concentrated in that its top 10 holdings account for over 60% of the fund. Its top three holdings, Delta Airlines, American Airlines, and Southwest Airlines, all account for weightings of over 10% of assets. Below, you can take a look at an overview of the JETS ETF’s top 10 holdings using TipRanks’ holdings tool.
As you can see, JETS’ top 10 holdings feature fantastic Smart Scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A Smart Score of 8 or higher is equivalent to an Outperform rating.
Seven of JETS’ top 10 holdings feature a Smart Score of 8 or above, led by Delta, United, and Air Canada, which boast ‘Perfect 10’ scores.
As noted above, while JETS is an ETF geared towards airlines and investors who want to make a directional bet on them, its investment universe isn’t limited to just airlines. It also invests in a number of stocks related to the air travel industry, such as travel booking sites like Booking Holdings, Tripadvisor, and Expedia.
Furthermore, companies that manufacture aircraft are also represented through the likes of Boeing and Airbus, and there are even several publicly-traded airports like Grupo Aeropuertario Del Sureste and Aeroports de Paris in the portfolio.
Additionally, JETS holds a strong ETF Smart Score of 8 out of 10.
Is JETS Stock a Buy, According to Analysts?
Turning to Wall Street, JETS has a Hold consensus rating, as 58.4% of analyst ratings are Buys, 33.06% are Holds, and 8.54% are Sells. At $23.69, the average JETS stock price target implies 9.44% upside potential.
High Fees, Lack of Dividend
There are two minor negatives investors should take note of with this ETF. First, its expense ratio of 0.6% is relatively high. An 0.6% expense ratio means that investors would pay $60 in fees on a $10,000 investment in year one as a holder. These fees can begin to compound and add up over the years. Secondly, the other drawback is that JETS does not currently pay a dividend.
Cleared for Takeoff
While JETS’ consensus rating is a Hold, TipRanks’ Smart Score gives JETS an Outperform rating. With JETS’ strong year-to-date run, it’s likely that some analysts haven’t yet adjusted their expectations and price targets for the industry.
Nevertheless, this doubt is also part of what could drive JETS even higher. Despite its strong year-to-date performance, valuations in the sector are still decidedly cheap. For example, top holding Delta Air Lines trades at under 8 times forward earnings. Meanwhile, two other holdings with weightings of ~10% or more, United and American Airlines, are even cheaper; United trades at under 6 times forward earnings, while American trades at about 6.5 forward earnings.
The other stock with a weighting of over 10%, Southwest, is a bit more expensive at about 13.5 times forward earnings, but this is still a sizable discount to the broader market, as the S&P 500 currently trades at about 19 times forward earnings.
With a solid consumer base contributing significantly to the industry’s revenue—especially since COVID—and showcasing an impressive increase in their spending power, coupled with appealing valuations and high Smart Scores, the JETS ETF’s upward trajectory may just be beginning.
