What is the best airline ETF?
Many people are looking to gain exposure to airlines and airline stocks. Right now, oil prices are still nowhere where they used to be. Airlines are cutting costs across the board as well as have to maintain low fuel costs.
That all make sense and provides a bullish case for airline stocks.
When people are interested in a sector rather than picking individual stocks they pick an ETF as it is seen as a diversified way to have exposure to a sector. Airlines are no different as there are multiple ETF’s to choose from. Throughout the rest of this article, we will go through three of the most popular ones and decided which is the true airline ETF.
Again, there are many reasons to be bullish on airplane stocks. Low fuel costs. Cost cutting like it’s going out of style. They pretty much charge for your to breathe on an airplane at this point.
So we want exposure to airlines and we want to do it through and airline ETF…let’s see what is behind door #1.
A simple Google search will undoubtedly land you on some article by some journalist pretending to be a trader speaking about $JETS. The “ETF Ser Solutions US Global Jets ETF” is (shockingly) the most popular airline ETF…probably because of its name (which is a joke).
While it has a cool symbol, does it actually do what we want it to do? We want it to be a liquid way to get exposure to the airline industry. What’s the first step in doing so? Seeing if $JETS moves like the other airline stocks!
We can see there is a decent correlation with the most correlated stock to $JETS being $UAL (United Airlines). This marginally passes our correlation test. What about liquidity?
The bid/ask spread during trading hours for $JETS is not bad at all. We will take $0.06 cents. What about stock volume?
LOL. Less than 20 thousand shares is a joke. This tells me that while journalists on the internet who think they are traders care about $JETS, no institutions do. If the stock volume is this low we can assume the options volume is equally embarrassing.
Nice effort everyone. But why were no options traded today?
Because the options spreads in $JETS are so wide you can drive a car through them. $JETS is not the airline ETF and we hope that anyone who is reading this completely forgets about it. Let’s see what is behind curtain #2 (it’s almost impossible to be worse than what was taking up space behind door #1).
The “SPDR SPDR Transport ETF”? I almost feel like that is a typo. We get the picture people…it’s a SPDR. People let’s not get ahead of ourselves. Let’s give it a fair shot and check it’s correlation to the five major airline stocks.
$XTN has a worse correlation to the top 5 airline stocks than he who shall not be named did. What about liquidity?
Well here’s a real gem. $0.09 wide on the bid/ask spread in the middle of the day is okay but not great. But what is that you say? Don’t they have options? Oh boy.
If $XTN doesn’t have options we can just stop right here. We cannot and will not make any investment or trade in any stock or ETF or whatever if there are no options. We need options to be able to reduce our risk and give ourselves a better chance of making money.
Please omit $XTN from your memory. I feel like whatever is lurking behind door #3 HAS to be better.
The iShares Transportation Average ETF is the ETF behind door #3 and is last on our list to see if we can find the real true airline ETF. The other two competitors are long gone. Let’s get right to it…correlation time.
$IYT is the most correlated $ETF we have seen thus far although it strangely is completely uncorrelation to Delta Airlines ($DAL). However, it does have three stocks that it is highly correlated to in Alaska Airlines ($ALK), Boeing ($BA), and Southwest Airlines ($LUV).
Alright, I’m starting to feel good here. Maybe $IYT is going to be crowned the winner after all. Liquidity time.
On an ETF over $150 a share, an $0.11 bid/ask spread on the stock is not bad at all. This passes our test but we need to see better metrics here. What about volume?
Ugh. C’mon. This is not a good number. 609,424 is a lot more shares traded in a day than our other two competitors but it is not a sign of strong liquidity as only $101,243,609.12 in notional value traded today is not a lot of money. This highly correlated ETF is starting to look like it is not liquid enough for us. Options time.
Nope…not good enough. 522 options contracts are again significantly more than our other competitors but not enough.
The lack of options volume makes sense when we look at the options markets in $IYT. We have bid/ask spreads here as a minimum of $0.30 wide which means you will 100% be losing money right off the bat if you are able to execute a trade here in $IYT’s options. This is a no go as hedging your stock position would result in an immediate loss off the bat.
What is the Real Airline ETF Going to be?
$JETS, $XTN, and $IYT have failed us all. None of them are liquid enough not to get ripped off trading and investing in. But have no fear! We are still going to find you exposure to airlines in a liquid underlying.
$EEM (iShares MSCI Emerging Markets ETF) is (obviously) the emerging market ETF. Notice something here.
All of the stocks here are US based airline stocks. They have nothing to do with emerging markets as emerging markets are literally every country outside of the US. But remember with correlation we do not care at all what the symbol or the sector is, we only care about price movement. $EEM is highly correlation to three of these stocks including Southwest Airlines ($LUV), Boeing ($BA), and Alaska Airlines ($ALK). If $EEM has any solid liquidity it will be the true airline ETF as it would give us the proper exposure to airlines with the proper liquidity.
Do we even need to say more? $EEM has ridiculous volume and traded a total notional value of $2,411,740,757 today!!!!!
We don’t even need to go into the fact that in the $EEM options market investors traded 432,121 contracts for a grand total of $1,624,342,839 of notional value.
Endo story. Remember, in order to crown a true airline ETF we needed two things:
- High correlation to airline stocks
- High liquidity
$JETS, $XTN, and $IYT were all semi-correlated but lacked liquidity. $EEM, on the other hand, had high correlation and insanely high liquidity.
Want exposure to airlines? Invest in $EEM.