Airline ETFs: What they are and how to invest

The global airline industry finds itself in an era of significant transformation. Influenced by economic shifts, technological advancements and evolving travel habits, this sector remains a vital part of the global economy, offering a range of investment opportunities. 

Airline exchange-traded funds (ETFs) stand out as a noteworthy option, providing a unique entry point into this dynamic industry.

Airline ETFs trade on stock exchanges like stocks, allowing investors to gain exposure to various airline companies with a single investment. This approach simplifies investing in the airline sector and provides a degree of diversification, which can help reduce the risk associated with individual airline stock investments. Let us explore the world of airline ETFs, their structure, potential benefits and key considerations.

What to know about airline ETFs

Investing in the airline industry is possible through ETFs, which offer a unique and streamlined approach. Airline ETFs provide investors with a diversified portfolio of airline-related stocks, allowing them to avoid concentrating their investments on individual companies.

Some airline ETFs hold reputable stocks like American Airlines, which pay dividends, offering savvy investors an opportunity to enhance their portfolios through dividend investing. 

Airline ETFs typically include a range of airline stocks, encompassing major carriers, regional airlines and ancillary businesses within the industry. Investing in an airline ETF can mitigate risks associated with relying on a single airline stock. These funds focus on the airline industry, offering exposure to its potential growth and resilience.

The largest travel ETF is the U.S. Global Jets ETF NYSEARCA: JETS, which includes passenger and cargo airlines. You can invest in other transportation ETFs, such as the iShares U.S. Transportation ETF NYSEARCA: IYF or MAX Airlines 3x Leveraged ETN NYSEARCA: JETU.

Understanding the advantages of airline ETFs

While individual airline stocks offer the potential for significant gains, they also carry a heightened degree of risk. On the other hand, airline ETFs provide a diversified approach to investing in the airline industry, offering several distinct advantages for investors seeking to participate in this market sector.

Diversification: Spreading your wings 

One of the primary benefits of airline ETFs lies in their ability to diversify risk. Rather than placing your bets on a single airline company, ETFs offer exposure to a basket of airline stocks. This diversification strategy effectively spreads risk across multiple companies, reducing the overall impact of any setbacks a specific airline faces. 

Should one airline experience financial turbulence, the performance of other airlines within the ETF can potentially offset losses and maintain stability.

Industry-specific risk: Navigating turbulence 

The airline industry is inherently susceptible to various factors that can cause volatility, including:

• Fluctuations in fuel prices: The price of jet fuel is a significant cost for airlines, and fuel price changes can significantly impact their profitability. For example, in 2008, the price of jet fuel more than doubled, which led to a sharp decline in airline profits.
• Economic conditions: The economy's health can also affect the airline industry, as consumers are less likely to travel when the economy is weak. For example, during the Great Recession, air travel declined as consumers cut back on discretionary spending.
• Geopolitical events: Geopolitical events, such as wars or natural disasters, can disrupt air travel and cause airlines to lose revenue. For example, the September 11 attacks led to a sharp decline in air travel, as people were afraid to fly.
• Regulatory changes: Regulatory changes, such as new rules on emissions or security, can also affect the airline industry. For example, introducing new emissions standards can increase the airline's cost.

In addition to these factors, the airline industry is also affected by technological changes, such as the development of new aircraft and the emergence of new travel options, such as ride-sharing services. 

These factors can make it difficult for airlines to plan for the future, leading to financial performance volatility. As a result, airlines often have to take steps to hedge their risks, such as purchasing fuel futures or entering into contracts with fuel suppliers.

Airline ETFs can help mitigate these risks by spreading exposure across multiple airlines and industry segments. This broader diversification reduces the impact of any single event on the overall portfolio, leading to potentially more stable returns and reduced volatility compared to investing in individual airline stocks.

Unlocking stable returns and reduced volatility

By holding a diversified portfolio of airline stocks with varying market capitalizations, airline ETFs can offer more stable returns and less volatility than individual airline stocks. This stability stems from the fact that the performance of any single company does not as heavily influence ETFs. Instead, they track the broader performance of the airline industry, which can offer a smoother ride through market fluctuations.

Airline ETFs provide a compelling option for investors seeking exposure to the airline industry while managing risk effectively. Their diversification benefits, industry-specific risk mitigation and potential for stable returns make them a valuable tool for navigating the skies of the financial markets.

Top airline ETFs to consider

When researching airline ETFs, understanding each fund's distinct characteristics is essential to align your investment strategy with your financial goals and risk tolerance. Here is a closer look at some of the prominent airline ETFs available in the market, along with key insights into their holdings, expense ratios and historical performance:

U.S. Global Jets ETF

The U.S. Global Jets ETF NYSEARCA: JETS, which includes prominent airlines like American Airlines NASDAQ: AAL, Southwest Airlines NYSE: LUV, United Airlines NASDAQ: UAL, Delta Air Lines NYSE: DAL and Alaska Air NYSE: ALK, has a significant market capitalization and is a leading option for investors seeking comprehensive exposure to the global airline industry. 

With $1.58 billion in assets under management, JETS offers a diversified portfolio encompassing 56 companies, from established U.S. carriers to international players and dedicated cargo airlines. This breadth provides access to a broad spectrum of the aviation landscape, potentially mitigating risks associated with individual companies or regional markets.

However, investors should be aware of the cyclical nature of the airline industry reflected in JETS' historical performance in a long-term investment context. 

Periods of significant growth have been interspersed with downturns, highlighting the inherent volatility associated with this sector. A long-term investment horizon and tolerance for potential fluctuations are crucial if you consider JETS as an investment.

JETS presents a compelling option for those seeking a single instrument to access the global airline industry. Its 0.60% expense ratio aligns with industry averages, making it a cost-effective way to diversify broadly, providing a well-rounded approach to capturing the potential of the global airline industry.

iShares Transportation Average ETF 

While the U.S. Global Jets ETF focuses solely on airlines, the iShares Transportation Average ETF BATS: IYT takes a more expansive approach, offering investors a diversified mix of the broader transportation sector. 

With $907.77 million in assets under management, IYT holds 48 companies, including airlines, railroads, trucking giants and logistics firms. This broader scope offers several advantages for risk-conscious investors.

First, IYT diversifies beyond the cyclical nature of the airline industry. While airlines remain a significant component of the ETF, the stability of other transportation businesses balances performance, potentially leading to smoother returns over time, which can appeal to you if you seek long-term growth with reduced volatility.

Second, IYT offers exposure to other high-potential segments within the transportation sector. Railroads, for instance, have benefited from growing freight demand while the logistics industry adapts and thrives in the e-commerce age. By gaining exposure to these diverse segments, IYT provides a broader play on the overall growth of the transportation sector.

Furthermore, IYT boasts a competitive expense ratio of 0.39%, making it a cost-effective way to access a diversified basket of transportation leaders. Its 1.16% dividend yield provides a welcome income stream for investors seeking regular returns.

Overall, IYT caters to investors seeking a broader exposure to the transportation sector than airlines. Its diversified portfolio, consistent historical performance and attractive fee structure make it a compelling option for those seeking long-term growth with reduced volatility and the potential for income generation. However, it's important to remember that the broader transportation sector also carries risks and uncertainties, requiring careful research and understanding before investing. 

SPDR S&P Transportation ETF

While the iShares Transportation Average ETF takes a broader sweep of the transportation landscape, the SPDR S&P Transportation ETF NYSEARCA: XTN offers a more focused journey by closely tracking the S&P Transportation Select Industry Index. 

With $193.68 million in assets under management, XTN provides exposure to 44 companies across airlines, railroads, trucking giants, marine ports and related services. This targeted approach offers distinct advantages for specific investor profiles.

Firstly, XTN tracks a well-established and recognized index, providing investors with a transparent and rules-based approach to selecting holdings. This strategy can particularly appeal to those seeking a low-maintenance way to access diversified transportation sector exposure.

Secondly, XTN's focus on the S&P Transportation Select Industry Index ensures exposure to established leaders within each transportation segment. By holding companies deemed significant by this respected index, XTN offers a potentially less volatile option than broader diversification strategies.

Furthermore, XTN boasts a competitive expense ratio of 0.35%, making it a cost-effective way to track the performance of the transportation sector. Its 0.86% dividend yield also provides a welcome income stream for those seeking regular returns.

Overall, XTN caters to investors seeking a focused and index-based approach to the transportation sector. Its association with the S&P Transportation Select Industry Index, emphasis on established players, and attractive fee structure make it a compelling option for those seeking steady growth with reduced volatility and potential income generation.

Invesco Dynamic Leisure and Entertainment ETF 

While the previous ETFs focused solely on the transportation sector, the Invesco Dynamic Leisure and Entertainment ETF NYSEARCA: PEJ also includes the leisure and entertainment sectors. 

With $306.77 million in assets under management, PEJ offers a diversified basket of 33 companies spanning airlines, hotels, casinos, restaurants and theme parks. This broader canvas opens new possibilities for investors seeking unique exposure beyond the skies.

PEJ provides a thematic play on the resurgence of leisure and entertainment post-pandemic. While airlines remain a significant component, their performance is mixed with hotels, casinos and other players in the leisure and entertainment sectors. This interconnectedness can lead to smoother returns as one segment compensates for fluctuations in another, offering a more nuanced approach to economic recovery.

PEJ offers exposure to high-growth leisure and entertainment industry segments. Theme parks, for instance, are showing robust recovery, benefiting from pent-up demand and increased disposable income. Similarly, the burgeoning travel and tourism sector can offset airline performance within the PEJ portfolio. By tapping into these diverse growth engines, PEJ provides a broader, potentially higher-growth play than pure airline ETFs.

However, investors should be aware of PEJ's higher expense ratio of 0.58% compared to other ETFs. Additionally, its smaller dividend yield of 0.39% may not appeal to those seeking passive income streams. Ultimately, PEJ caters to investors seeking a thematic approach to the post-pandemic recovery alongside diversified exposure to airlines within the broader leisure and entertainment landscape.

While volatility remains a factor due to the sector's susceptibility to economic fluctuations and consumer confidence, PEJ's dynamic composition and high-growth potential can appeal to investors with a longer-term horizon and an appetite for exposure beyond traditional transportation plays. 

Factors influencing airline ETF performance

Investing in airline ETFs offers the potential for significant gains while exposing you to the dynamic realities of the aviation industry. However, several external factors can influence the performance of these ETFs, creating both opportunities and challenges for investors. Understand the impact on the industry so you can take proactive measures to stay informed.

Fuel prices: A costly headwind

Fluctuations in fuel prices pose a significant challenge for airlines and, consequently, for airline ETFs. Rising fuel costs translate into higher operating expenses, squeezing profit margins and potentially impacting shareholder returns. Conversely, periods of lower fuel prices can revitalize airline profitability and boost ETF performance. 

Investors should monitor global energy markets and economic trends to anticipate potential fuel price movements and their impact on airline ETFs.

Geopolitical events: Turbulence on the global stage

Political instability, regional conflicts and natural disasters can significantly disrupt airline operations and travel demand. 

These events can lead to route closures, cancellations and decreased consumer confidence, impacting airline revenues and ETF performance. Staying informed about global geopolitical developments and their potential impact on specific regions or airlines is crucial for investors navigating this volatile landscape.

Regulatory changes: Adjusting to shifting airspace

Government regulations, safety standards and environmental policies can influence airline costs, operational efficiency and route availability. While stricter regulations can enhance safety and environmental sustainability, they may also increase operating expenses and impact profitability. 

Conversely, policy changes favoring airlines, such as tax breaks or subsidy programs, can positively impact airline performance and ETF returns. Keep track of regulatory developments at national and international levels to assess their potential impact on the industry and specific airline ETFs.

Advancing technology: Smarter, faster, better

In addition to these factors, the growing implementation of artificial intelligence (AI) in various aspects of airline operations, including predictive maintenance, customer experience and route optimization, emerges as a key influencer on airline ETFs' performance and future direction. Investing in the development of artificial intelligence (AI) could be an enticing way to diversify your portfolio further. 

Staying informed: Navigating the skies with knowledge

Investing in airline ETFs requires proactive information gathering to anticipate the impact of external factors. Here are some valuable resources for staying informed:

• Industry news outlets: Follow reputable news sources specializing in the aviation industry for updates on airline performance, fuel prices and geopolitical developments. You can also use the "News Headlines" section of MarketBeat’s stock analysis for each fund you are interested in tracking.
• Government websites: Access official government websites responsible for regulations and policies affecting the airline industry. For example, the U.S. Department of Transportation has a wealth of information on current airline regulations.
• Financial analyst reports: Utilize research reports from investment firms and financial analysts to gain insights into individual airlines and airline ETF performance. In addition, you can also find more detailed recommendation information in the "ratings" section of the fund's page on MarketBeat. 
• Industry conferences and events: Attending industry conferences and events can provide valuable insights into current trends, challenges and future prospects for the airline industry.

By understanding the external factors influencing airline ETF performance and actively staying informed, investors can navigate the skies of the market with greater confidence and make informed decisions that align with their risk tolerance and investment goals.

Pros and cons of investing in airline ETFs 

Investing in airline exchange-traded funds (ETFs) offers a unique opportunity to participate in the potential growth and resilience of the airline industry. However, like any investment, there are advantages and disadvantages to consider before diving into airline ETFs. Let's explore the pros and cons of investing in these funds, providing you with a comprehensive understanding of their potential benefits and challenges. 

By weighing these factors, you can make informed decisions and determine if airline ETFs align with your investment goals and risk tolerance. 

Pros

The benefits of investing in an airline ETF include:

• Diversification: Investing in an airlines ETF diversifies investors by holding a basket of airline stocks. This diversification helps mitigate the risks associated with investing in individual airline companies. It means that if one airline company underperforms, the impact on the overall investment is reduced since the ETF includes other airlines that may perform well. Consider including travel ETFs, which contain a mixture of airline and hospitality stocks like hotels, cruise lines, car rental companies and travel agencies. Researching multiple market sectors to find mixed ETFs that include airline stocks provides the bonus of simultaneous exposure to multiple industry sectors, increasing the diversification of your portfolio.
• Industry exposure: Airline ETFs offer investors exposure to the airline industry as a whole, allowing them to participate in the potential growth and resilience of the sector. It means that investors can benefit from the overall performance of the industry rather than relying on the success of a single airline company.
• Convenience and accessibility: ETFs are traded on stock exchanges, making them easily accessible to investors. They can be bought and sold throughout the trading day, providing flexibility and liquidity. Investors can invest in airline ETFs through brokerage accounts, just like they would with individual stocks.
• Cost efficiency: Airline ETFs generally have lower expense ratios than actively managed funds. This cost efficiency can attract investors looking for a more affordable investment option, as lower expenses can positively impact long-term returns.
• Professional management: ETFs are managed by experienced professionals who aim to track a specific index or strategy. Investors can benefit from the expertise of the fund managers who make investment decisions on behalf of the ETF, saving them the time and effort of researching and selecting individual airline stocks.
• Liquidity: An airline's ETF will typically have higher trading volumes, which translates into greater liquidity. This liquidity allows investors to enter or exit their positions more easily without significantly impacting the market price of the ETF. It provides flexibility and ensures that investors can execute their investment decisions efficiently.
• Risk mitigation: By investing in an airline ETF, investors can diversify their exposure across multiple airlines, reducing the impact of adverse events specific to a particular company. This diversification can help mitigate the risk associated with unforeseen circumstances, such as economic downturns, fuel price fluctuations, or industry-specific challenges.
• Dividends: Some airline ETFs may distribute dividends to investors. These dividends provide a potential income stream for investors, adding to the overall return on their investment. Research how to choose the best dividend-paying stocks and ETFs if obtaining an income stream from your portfolio is part of your investment strategy. 

Each of these pros represents a potential benefit to investors considering airline ETFs. By carefully assessing these advantages, investors can determine whether investing in airline ETFs aligns with their investment objectives, risk tolerance and overall portfolio strategy.

Cons

The downsides can potentially include:

• Industry volatility: The airline industry is known for its inherent volatility, as it is susceptible to factors such as fuel prices, geopolitical events, economic conditions and regulatory changes. Investing in airline ETFs means being exposed to these industry-specific risks, which can result in fluctuations in the value of the investment. Investors should be prepared for potential periods of volatility and be able to tolerate short-term fluctuations in their portfolios.
• Economic sensitivity: The airline industry is closely tied to the economy's overall health. During economic downturns, demand for air travel tends to decline, affecting airline revenues and profitability. This economic sensitivity can impact the performance of airline ETFs, and investors need to be aware of the potential impact of economic cycles on their investments.
• Company-specific risks: While airline ETFs provide diversification, they still carry company-specific risks. Certain airlines within the ETF may face individual challenges such as labor disputes, rising operating costs, management issues or competitive pressures. These risks can significantly impact the performance of the ETF and the overall investment returns.
• Regulatory and political factors: The airline industry is subject to extensive regulations and policies at both the domestic and international levels. Changes in air travel regulations, government policies or political events can affect the industry and the performance of airline ETFs. Consider the potential impact of regulatory and political factors on their investment and monitor regulatory changes and air travel consumer reports. 
• Concentrated exposure: Although airline ETFs aim to provide diversification, they may still have a significant portion of their holdings concentrated in a few major airlines. If these major airlines face substantial challenges or underperform, it can impact the overall performance of the ETF. Investors should be aware of the concentration risk and its potential implications.
• Lack of control: Investing in ETFs means relinquishing direct control over individual investment decisions. The fund managers make decisions on the composition and weightings of the ETF's holdings. While this can be advantageous regarding professional management, it also means that investors have limited control over the specific stocks held in the ETF.
• Fees and expenses: While ETFs generally have lower expense ratios than actively managed funds, they still come with fees and expenses. These costs can reduce the net returns to investors over time. Investors must consider the fees associated with investing in airline ETFs and assess their impact on long-term investment performance.
• Market risk: Like any investment, airline ETFs are subject to general market risks, including fluctuations in stock prices, interest rates and overall market sentiment. Market downturns or adverse investor sentiment can impact the value of the ETF, even if the underlying airlines are performing well. Research stocks and ETFs that have high market sentiment.

Considering these cons is crucial for investors evaluating airline ETFs. It is essential to carefully assess these potential risks and drawbacks in the context of one's investment goals, risk tolerance and overall portfolio strategy. 

How to add airline ETFs to your portfolio

Ready to take flight and add airline exchange traded funds (ETFs) to your investment portfolio? Let's briefly walk through how to incorporate these ETFs into your portfolio. From choosing a suitable brokerage account to conducting research and executing trades, each step is designed to help you confidently navigate the journey. 

Step 1: Evaluate your investment goals and risk tolerance.

Before adding any investment to your portfolio, evaluating your investment goals and risk tolerance is crucial. Is there an airline ETF that fits into your portfolio? 

Consider your time horizon, financial objectives and how much risk you are willing to take. Understanding these factors will help you determine the appropriate allocation for your chosen airline ETFs and ensure they align with your overall investment strategy.

Step 2: Choose a reputable brokerage account.

You'll need to open a brokerage account to invest in airline ETFs. Research and choose a reputable brokerage offering access to a wide range of ETFs, including airline ones. Consider factors such as account fees, trading commissions, available research tools and user-friendly platforms. Selecting the right brokerage will provide you with a seamless investment management experience.

Step 3: Conduct thorough research on airline ETFs.

Before investing in specific airline ETFs:

1. Conduct thorough research to understand their underlying holdings.
2. Compare the airline stocks held within the ETF, expense ratios, performance history and investment strategies.
3. Analyze factors such as the ETF's tracking index, the weightings of individual airlines in the ETF, any growth-related stocks they might hold and any specific sector or geographic focus. This research will help you make informed decisions and select the ETFs that best align with your investment goals and preferences.

Step 4: Determine the appropriate allocation.

Assess your investment goals and risk tolerance to determine your portfolio's appropriate allocation percentage for airline ETFs. Consider factors such as your existing asset allocation, diversification across different sectors and the level of exposure you desire to the airline industry. Balancing your portfolio with other asset classes will help maintain a well-diversified, risk-managed investment approach.

Step 5: Place your trade.

Once you have selected the airline ETF you wish to include in your portfolio and determined the desired allocation, it's time to place your trade. 

Access your brokerage account, navigate to the trading platform and enter the details of your selected ETF purchase. Specify the number of shares or the dollar amount you wish to invest. Review the trade details and confirm the execution. Be mindful of any trading fees or commission charges associated with the transaction.

Step 6: Monitor and review regularly.

After adding airline ETFs to your portfolio, monitoring their performance is essential. Keep an eye on the ETFs' overall performance, airline industry changes and any market events that may impact the ETFs' value. 

Review your chosen ETF's holdings and listen to earnings calls for each stock the ETF holds to ensure that the ETF and its underlying holdings align with your investment goals. Regularly reviewing your portfolio will allow you to make any necessary adjustments or rebalancing decisions in line with your investment goals.

Following these steps, you can add airline ETFs to your investment portfolio with a well-informed and structured approach. Conducting thorough research is crucial to ensure the investment aligns with your specific financial situation and objectives. 

Tips for successful airline ETF investing

Investing in airline ETFs can be an exhilarating journey, offering significant growth potential alongside the dynamic thrill of the aviation industry. To ensure a smooth flight and maximize your investment success, here are some crucial tips to keep in mind:

Pre-flight check: Research before you invest

Research before you invest. Do the following:

• Know your risk tolerance: Buckle up and assess your comfort level with volatility. Airline ETFs can experience swings due to fuel prices, other consumer staples used by the airline industry, economic headwinds, and geopolitical storms. Choose an ETF that aligns with your risk appetite, ensuring you're prepared for sunny skies and occasional clouds.
• Deep dive into the details: Research the airlines and other transportation companies within your chosen ETF. Understand their financial health, market positions and individual strengths. This helps you choose an ETF with a well-diversified and promising basket of holdings.
• Compare expense ratios: Don't let hefty fees eat into your returns. Analyze the expense ratios of different ETFs. Remember, even a small percentage can make a significant difference in the long run. Choose an ETF with a competitive ratio to let your profits soar higher.

Staying informed: Navigate the skies with knowledge

Next:

• Track industry trends: Keep your radar on the horizon and monitor key developments like fuel prices, passenger demand and regulatory changes. Stay informed about major airlines and potential disruptions that could impact the performance of your chosen ETF.
• Be a news hawk: Read financial reports, expert opinions and analyst insights on the airline industry. This equips you with valuable information to anticipate market shifts and make informed adjustments to your investment strategy.
• Utilize ETF resources: Many providers offer resources like performance data, portfolio updates and market commentary. These are your in-flight entertainment, keeping you engaged and informed about your ETF and the broader aviation landscape. Use MarketBeat’s suite of tools to ensure that you stay on top of the holdings of your ETFs.

Long-term cruise control: Embrace a sustainable approach

• Weather the cycles: The airline industry has ups and downs like weather patterns. Invest with a long-term perspective, weathering short-term turbulence to benefit from the potential for significant long-term gains.
• Spread your wings across the market: Don't put all your eggs in one basket. Diversify your portfolio with different airline ETFs, other more conservative ETFs, and multiple asset classes. This helps mitigate risk and creates a more stable flight path for your financial journey.
• Regular tune-ups: Regularly review your ETF investments and adjust your strategy as needed. Be willing to adapt to changing market conditions and update your holdings based on your evolving risk tolerance and financial goals.

Soar to success with your portfolio

Airline ETFs offer investors a unique avenue to tap into the potential growth and resilience of the airline industry. By diversifying exposure across multiple airlines, investors can mitigate risks associated with individual company performance and benefit from the airline industry.

Investing in airline ETFs requires careful consideration of both the pros and cons. On the one hand, they provide diversification, industry exposure, convenience and professional management. On the other hand, they are subject to industry volatility, economic sensitivity and company-specific risks. Investors must weigh these factors and align their investment goals and risk tolerance accordingly.

As the airline industry continues to evolve and adapt, investing in airline ETFs can provide opportunities for investors to participate in its growth. With careful consideration, diligence and ongoing evaluation, investors can benefit from the dynamic nature of the airline industry and the advantages offered by airline ETFs.

FAQs

Questions often arise in the vast landscape of airline ETFs, seeking clarity amidst the investing turbulence. Let's look at some of the most commonly asked questions regarding airline ETFs. 

Are there any airline ETFs? 

Yes, there are several airline ETFs available in the market. These ETFs aim to track the airline industry's performance by holding a diversified portfolio of airline stocks.

What is the largest travel ETF? 

The largest travel ETF is the JETS ETF. The US Global Jets ETF NYSEARCA: JETS should track the performance of the U.S. Global Jets Index, including passenger airlines and cargo airlines.

Is JETS a good ETF to buy?

The suitability of the U.S. Global Jets ETF NYSEARCA: JETS, or what is commonly called the JETS ETF, or any ETF for that matter, as an investment depends on various factors such as individual investment goals, risk tolerance and market conditions. Conduct thorough research and consider your investment objectives before making any investment decisions.