Airline ETF: Flying High or Low on Fuel?

An airline exchange traded fund (ETF) tracks the performance of major passenger airlines. Most ETFs focus on a particular type of security; for example, you may find a socially conscious ETF, a retail ETF or a small business ETF. By focusing on one industry, an ETF offers investors a chance to take part in the growth of that particular sector. This is possible through mutual funds as well, but the advantage of an ETF is the way it allows investors to purchase and sell shares easily on the open market. With these advantages, buying into an ETF is attractive, but how will an airline ETF fare in comparison to other industry-related funds?

What does an Airline ETF Track?

Each airline ETF is made up solely of shares in various airlines. The airlines that are included depend on the specific fund. Many funds track the NYSE Arca Global Airline Index. Others may select a few airlines, such as regional or discount suppliers, in order to build the fund. The Arca Global Airline Index includes companies like Southwest, Jet Blue and USAir. Whenever one airline goes up in share price, the entire fund will benefit as long as another company has not experienced a drop.

How Profitable is an Airline ETF?

In the past, the airline industry has not been particularly profitable. While certain airlines, such as Southwest, have managed to generate income, the high cost of operating an airline cuts into a large degree of profits for most companies. As a result, airline ETFs can be highly risky. The airline industry is susceptible to changes in fuel costs, adverse weather and employee strikes. Other ETFs may be more stable, but the risk associated with an airline ETF can lend itself to high profits if the timing is right. In 2010, some airline ETFs tracking the Arca Global Airline Index saw up to 6 percent increases.

What are the Risks?

When you invest in an airline ETF and share prices fall, you stand to lose a chunk of your investment. Each ETF is made up of the sum of its underlying assets. Investors share the total sum, and they receive dividends based on the performance of the fund as a whole. When airlines suffer a period of loss, the fund as a whole will be suffering, and dividends can fail to outpace inflation, costing you money instead of earning you money. Further, if your fund is not performing, you may have difficulty selling your shares at a profit.

Where Can I Purchase Shares?

If you wish to buy into an airline ETF, you can purchase shares on any of the major markets. The key benefit to buying into an ETF is this ease of purchase and sale. You can speak to an investment adviser to determine which ETF you would like to invest with. You may also simply buy shares using an online trading platform, if you already have an account and are accustomed to these types of purchases.

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