JETSANITY: How a Obscure Airline ETF Became an Overnight Sensation

the Panhandle of Florida, Miramar Beach. They opened the beaches there a couple of weeks ago. He's lives by himself. He's been going crazy. So I'm gonna bring my oldest son. We're gonna fly down on on tickets that were a third of the normal cost and then use that extra budget to you know, eat like kings down there, go to the beach. It's gonna be nice and hot and warm. To be careful when we, you know, leave the house

through the you know, the airport and the airplane. But we have masks, and you're braver than I am, my friend, So you're going to the beach. And you're taking a flight to Florida, which brings us to the theme of this episode of Trains. Um, we're gonna speak with Frank Holmes, the CEO of the E t F Jets, which I'm really excited about because this E t F right now, Eric's just there seems to be a ton of interest in it, right yeah, you know, Um, I'm calling it

Jet Sanity because it reminds me of Lynn Sanity. Remember that little point guard Asian point guard from like two thousand twelve who came off the bench and like schooled Kobe Bryant and like took over New York City for about two months. This is yeah, this is the same thing, except for an E T F. Let me give you some numbers on jets. Jets went like years with a flow here and there over the course of a year.

Then it goes down like right during the crisis. Since it went down, it's attracted a lot of people looking to play a rebound. But here's the stats that I'm just so blown away by. It's taken in flows for forty eight forty nine straight days, which is unheard of. Vanguard does that on occasion, and that's Vanguard. This is a theme et F. It's also taken in six and

sixty three million. This fund had maybe twenty million UM three months ago, and so we compared it to other theme ETFs when they quote caught fire like Robo, m J and Hack, and those did nothing. They couldn't even touch this amount of intensity in terms of a theme ETF sort of like capturing the moment. So there's that, and then there's the issue of all the people buying it. A lot of them are likely retail investors who are taken the other side of a trade for more and Buffett.

So you've got this David and Goliath trade going on, Buffetts selling airlines, and you've got a lot of retails saying no, it's to go up. And who will win we don't know, but it's fascinating story. So I'm looking at the Jets share price and it's basically been flat until early February, and then all of a sudden it starts to come down, and by March it has plunged from about just around thirty dollars UM in the middle

of February to about twelve dollars in mid March. It's sort of recovered and then has kind of come back down and now it's aid about twelve dollars. That is an epic, epic change, this time on trillions. Jet Sanity, Frank, welcome to trillions. I gotta ask you, this has been um clearly a weird stretch in the history of the world. And you know you happen to be sort of like lying in a cockpit of a plane that your business model has been really disrupted. Here when did you get

a sense of how bad this might get? Well, you know, I started this at this jet c t F five years ago and that was almost where the where I launched it with a flow started coming in massively and it went nowhere. We went to a hundred millions shortly right after we launched it, and then it went nowhere, sideways, up and down. And it's interesting because you mentioned hack. You know, Hack didn't really grow until Sony was hacked and all of a sudden it woke up. And the

same thing happens with with the airline ETF. And we've been doing webcasts now four times a year to r A S only and family offices across the nation. We've done about twenty of them over the past five years, and it seems that this audience and specially heads funds

that play the airline industry, came into it. We know that we've had a lot of small heads funds that will go along the e t F to short the stocks they don't like in the airline industry, and they play it this way as they're sort of a pear's trade. But it really accelerated as the fun fell. It's just like hack. Hack had to get solely to get hacked to all of a sudden being become aware, and that's it took place here. When we analyze thematic e t F s, we always say they need a shiny object

moment to get going, and you're right. Hack was the sony hack. But the thing was that boosted cybersecurity stocks. Same thing with Robo and MJ it was when they went up. This is the rare case where the shiny object was in the decline. And I'm guessing it's the pe ratio. I think at one point the pe of jets was like four or five. I think I looked one time the only thing lower was Nigeria and the coal industry. How much of the people are retail bottom callers?

They do you find versus sort of the hedge funds at the beginning was predominantly heads funds that came in. That's what we've we've found, uh, And what we would hear from them is that they've done this research of how long did it take for the airline industry to rebound after the tech bubble after nine eleven, after Stars after two thousand and eight nine That trough to peak, Uh took from eight months to eighteen months, and was from eight to a hundred percent return on your money.

And they were the first coming in looking for that bounce. So I gotta ask because when you know, the last time something that's significant really happened to the airline industry was September eleventh, So here we are almost twenty years later. Airlines clearly came back after that. UM, you had a lot of institutional investors, including really noteworthy ones like the Warren Buffets of the world after the financial crisis, who came in and and you know, doubled down and made

a ton of money. But like the outlook for airlines right now, like we could just be looking at a lot of video conferences going forward and business travel that never comes back. What's your outlook for the airline industry from where you're sitting. So what is different is that the Beltway agencies and party what they like to call it sometimes and the and the administration are very cognizant uh being slow to support the airline industry. The FA came out and said one in fifteen jobs are related

to the airline industry. So it has a huge multiplying effect in his crucial for the hotels are turned around. Right now in Vegas, there's two hundred thousand empty rooms, three thousand people have lost their jobs. Uh, something's got to come back to get this multiplying effect of the economy. So there's a much greater focus on revising the airline industry based on previous studies. So that's the big game

changer here. And you saw from the cares Act how fast they responded, even when the negotiations were quick, get the money in maintained and get this industry turned around.

So I think that that's very positive, a constructive. The other thing that's really interesting for me is is the t s A publishes every day how many people they for the four airports they tracked, UH people they've screened, and that bottomed in April, we were almost doubled a number of people flying every day, and and there's new indicators coming out. And the other thing we've noticed is Google trends, so looking for people looking for hotels and

looking for travel. That's picked up, and it's really searched in Asia, which is sort of bottomed first. And I think as we come back into this economy, we're going to see more and more searches and and the sentiment, the quant funds that you sentiment indicators are looking at these two factors and they're plowing into it. That's what we hear and what we see. Well, what's interesting to me. You look at the holdings of this just so people listening, No,

it's in it. It's pretty obvious. Southwest Airlines, American Airlines, Delta Airlines, United Airlines. Then you get down to things like Spirit Airlines, um Quantas, So it's global, but it's not just a market cap waited plane vanilla or just simplistic uh construction. There's a couple of wirings in the design of this e t F talk about how the actual process works to put these holdings in there. Although

they seem obvious, it might not be exactly what people think. Right, Well, thank you for that opportunity, because there was thousands of hours put into this UH and to understand it is it um. What we looked at is that there's lots of bull of Zilian currencies and they can really be a big drag or head wind or tail winds your performance. So when we created this, we said, okay, what are the most five most important factors. And each night it would take eight hours ago and test a factor. And

then we tested on two systems. We tested on fact Set and we tested on Bloomberg to go back over ten years of data that see the robustness of which factor is UH deals well with rise economy, following economy, kruptcies, etcetera. So we distilled them down to five key factors. And then we took a look at waitings and we found that the four big guys that is American Airlines, Delta, H, Southwest, and United they capture about eighty of the traffic UH.

And so the portfolio because of limitations of legatory limitations, we said, have we maximized that? And we have four names. Those names twelve percent each and each quarter we re calibrate those. So that's forty eight percent of the portfolio

is really capturing the bulk of domestic travel. Now, when we went to foreign names and went outside of that like uh IS, we went one for twenty names, and that mitigated this currency volatility and allows us to catch those stocks that have the best factors like highest castle returns to investor capital growth and revue last quarter or four quarters gulth and castle last quo four quarters UH and other factors they look at for traffic flow of

the humory passenger seats, who have et cetera UH, and in between there in between those twenty names we have that are foreign and the four big names, we have a small group of names that are that are airports. They can be airports, they can be Boeing Airbus UH, they can be manufacturers, and that's where Hawaiian Airlines, Messa Airlines, Spirit all these other sort of smaller airlines would show up.

But it's more of a consolidated name of those are the most attractive, and each quarter we kicked them out and we bring them in if they don't have the highest cash board returns on invest in capital, if they're not showing revue growing. So it's a dynamic approach each quarter except for the big four names. So can you walk us through sort of what happened this last rebalance, because obviously that's in the middle of all of this, like what what basically what opportunities did you guys see

and how did you really allocate things? Then give you a really interesting part was that it was nine months ago that Boeing was kicked out. Uh, and then all the problems started coming. And you can see that showing up in this this sort of quant approach quantum they call it plunt of mentals, a combination of a quant approach of factors and fundamental analysis um. And and so we we see that rotation, and we see that we

own Messa populated. Then you have Hawaiian Airlines populated, Alaska populated. How this quarter will take place? Uh, the March numbers as they're slowly coming in. For the smaller names, we don't have them all. All the financials are not published to be able to give you how that change is gonna happen this quarter. But there will be rotations, and probably some of the biggest rotations will take outside of

the US where we have the twenty names. Remember this is a this is a portfolio thirty three names, four or forty eight percent and twenty or one. So it's a very compressed portfolio. And our bogie is to beat the New York Stock has change Global Airline Index. And that's what we've done with this model, uh since we

launched it. And you know, let's obviously diversifying. You you limit your upside, but you limit your downside, right, And I think that's part of what people are interested in when they buy an ETF over a single stock of to do research on every single company UM. One question I had just going back to the outlook on airlines, is the price to earnings ratio on this is currently nine and the price to earnings UM ratio for the S and P is four. Right, the airlines do do they?

Do they need to even rebound fully, like let's say they rebound halfway or six of the way. How much could that validate the bottom calling or will therell be bankruptcies which will take down the winners? How does that play out if say we go to fifty or six in the next two years not a hundred. I think that the difference is is that there's such a focus by the government both politicians and the agencies to get this industry turned around for job creation and the multiplying

effect from jobs from the airline industry. I've never seen it before to this degree. Um, so I think you're going to get a higher bet, higher percentage of survivors. One that's really that's sort of that the dust was Avianca. Arianca uh will hurt United because of debt lendings and

clone dusting. But really Avianca couldn't get government support because after they restructured their company over fifteen years ago, um, they moved at the Panama So the government of Columbia wasn't going to support them because they don't pay corporate taxes. Everything's went through Panama, and that was the case that it couldn't get government support. But that's not here. Here we've got to menace government support. And the same thing

is in Europe. And the other part that you're seeing here is like today, I believe the said starts buying corporate bond ets, so they're trying to create a stability. They're trying to get those rates down because what's happened in that market you don't really see like the tip of the iceberg. Oh, the ten year government bonds down to sixty basis points. Money is cheap, Actually it's not. Um. The cost of mezzanine funding shot from about a four

percent role to eight to eleven percent role. Every heads fund that's in that space, every special lender in that space automatic, it's just ratchet it up with all these covenants. For two year money is eight percent, it's not thirty basis points. And so the government I think is coming in to try to stabilize corporate lending by buying these A T s. That's very beneficial to the airline industry. Also.

So let me let me ask a slightly different way than what do you think the worst case scenario might be for jets? Are you thinking okay? So engage in the bounce. The bounce has historically been from eight to a hundred and so if you're embarrassed, really, Barris, we think it is going to be a short lived one. Or are you then you're gonna get sun from the lows? Uh? If they do tork it up that year from now,

we could see doubles. You've you've you mentioned how hedge funds were in early and looking at holders, I can see that it was like there's a Canner Fitzgerald position and invest Net Asset Management uh ubs is in their degreen capital management. Those are you know, people who tend to know what they're doing when they're getting in here, and you know, can stomach volatility. Eric also points out that number of robin Hood investors over the last two

months went from three hundred to twenty thousand. That's pretty significant, wondering what it's like to suddenly have that many retail investors show up well, as I think it would take a look at an ecosystem and you've got to have minnows with the tunas and these sharks and there's whales. You need a complete ecosystem and uh and it's so good to see that you have a bunch of minnows because it does create a real dynamic market so that you can see the volume trades millions of shares a day.

So I'm really thrilled about that UM and I think that will continue. And I think that the idea that more and these younger investors that are coming in through Robin they're much more quick to take a look at is the t S a data that comes with every day tracking that putting moving averages on that data, or look at Google trends, uh to all of a sudden go along and trade in and out around those positions. So I think it's great because it will attract bigger

institution money. I spend a lot of time tracking the E T F industry, the winners and losers. To me, it reminds me of Silicon Valley. Um, there's a lot of innovation and but a lot of failure. Just talk about take us into what it's just like to have a hit, um, especially when it looked like, you know, you go months and months with your literally an oblivion. Yeah. I looked at it. It's like you're bobbing along and it's averaging dollars a share, and then all of a sudden,

you know, you know, you have the pandemic hit. Yeah. And once you get this kind of liquidity, even if it goes up and some people take profits in your assets maybe go down to three million, you've now become the go to airline spots. So you're you've kind of made it. But just talk about that catching fire. What's that like to see inflows every day after months and months where you saw maybe one day of inflows in

like a year and a half. Oh, it's a wonderful feeling because I'm not have that elation since back in two thousand and six, where we were getting fifty million a day into our gold neutral funds. I went out and say, okay, I've got to get into the ETS. I have to get out of mutual funds, have to diversify.

And I picked an industry because I noticed Eric that my flights were all of a sudden limited by you know, five years ago, actually starting with ten years ago, the options to fly had dropped, the cost of a ticket went up. So I said, how do I make money with this and launch a product? And there was no other airline ETS, so launching it and and nurturing it along,

you know, it was. It was lots of love and nurturing it because knowing uh, it took a couple of years and all of a sudden, buffet starts recognizing the high returns of investor capital. I think that the economy turns, he comes back in. That's what I think it will be the game changer. So much of UM the airline's profitability has been rooted in sort of the business class

or first crap class traveler. If that uh segment doesn't come back for a long time potentially because you know, companies say, you know what, no more flying, you can just do video conferencing. What does that mean for the airline industry? Well, that would be tragic for the airline indust is no doubt. But we we see the first catering is the business. Business people can't wait to go and sell and tell and you yell the products and sales. You need to have sales. That's what drives revenue. And

human interaction is so important for that. And the Southwest airlines, Uh, they see that something more, you know, more than a third of their further passages or business, but sevent their profits that have higher margins business. And we've we talked about Warren Buffett earlier. What advice, Well, what would you tell him if you could tell him anything right now? Oh, I look up to this idol. I would just to

share with them that things will turn. He always talks about betting on America UM and he's worried about ten billion dollars. Then just go and plunk it down and give lots of capital. Southwest it's it's by far, you know, one of the best run airlines along with doubts up. When you look at all these types of metrics, UM, take them out. This is really fascinating. And you know,

congratulations on your against the odds hit product. UM. You know it's only about one in every twenty or thirty them ETFs gets to where you are with you know, over a hundred couple hundred million, UM, but yours is special because of the intensity. Again, it's reminds me of it's the theme ETF equivalent of insanity. Frank, Frank Holmes, thanks for joining us on Trillions. Thank you for the opportunity sharing my story. Thanks for listening to Trillions. Until

next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcast, Spotify, or wherever else you'd like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Weber Show, He's at Eric Baltunas, and you can find Frank Holmes at Bulldog Holmes and also at us Funds. This episode of Trillions was produced by Magnus Hendrick. Francesca Levy is the head of Bloomberg Podcast by