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Should You Bet On Airlines ETF Despite Mixed Earnings?

The airline stocks have been highfliers since the second half of 2015 on dirt cheap oil prices and encouraging fundamentals. Earnings picture was also pretty decent for the space. Higher margin, lower debt, surging ancillary revenues and a host of modifications in operations helped the sector gain altitude (read: Highflier Airlines Earnings : Time for JETS ETF ). As a result, the pure-play aviation ETF U.S. Global Jets ETF (NYSEARCA: JETS ) lost just 5.5% (as of January 21, 2016) after accounting for all the global market issues. This was quite respectable when compared with the 11.7% losses put up by the broader market ETF SPDR S&P 500 ETF (NYSEARCA: SPY ) in the same timeframe ( read: The 13 Best and Most Interesting ETFs to Launch in the First Half of 2015 ). In such a backdrop, all eyes were fixed on airlines earnings this season. But sadly, major carriers fell shy of investors’ expectations. Greenback strength appears to be main reason behind this underperformance. Q4 Results in Detail The season unveiled with Delta Air Lines (NYSE: DAL ) missing on both lines in Q4 of 2015. Results were hurt by the strength in the U.S. dollar, with foreign currency movements having an adverse impact of $160 million. However, Delta’s shares added 3.3% despite the earnings miss in the key trading session of January 19. This is because the company, the bottom line of which grew 51% year over year on low oil costs, expects to generate over $3 billion in savings in 2016 on steeply plunging oil prices. This Zacks ETF Rank #1 (Strong Buy) stock has a Zacks Momentum & Value style score of ‘A’ and a Growth score of ‘B’, at the time of writing. United Continental (NYSE: UAL ) also came up with soft Q4 results this month as both earnings and revenues miss. Adjusted earnings were up substantially year over year on lower fuel costs. Revenues declined 3% on lower passenger revenues. Cargo revenues were also downhill while the other revenues improved 10.9%. However, its indicators are promising with a Zacks ETF Rank #2 (Buy), and Value score of ‘A’ and Momentum score of ‘B’. Shares also added modest gains of about 0.5% to close January 21, the day it reported earnings. Yet another leading U.S. carrier Southwest Airlines Co. ‘s (NYSE: LUV ) fourth-quarter 2015 bottom line matched the Zacks Consensus Estimate while the top line missed the same. But investors should notice that revenues grew 7.5% year over year helped by 3.3% and 119% expansion in Passenger and Other revenues, respectively. This Zacks ETF Rank #1 stock also boasts hopeful indicators of Momentum score of ‘A’ each and a Value score of ‘B’. LUV was up 0.5% post reporting earnings. Though these heavy-weight companies underperformed on earnings, the sector has seen sturdy performances by others. Alaska Air Group Inc. (NYSE: ALK ) reported earnings (on an adjusted basis) of $1.46 per share in the fourth quarter, beating the Zacks Consensus Estimate of $1.43. Earnings increased 55% year over year. Revenues of $1.38 billion were in line with the Zacks Consensus Estimate. The top line grew 5% on a year-over-year basis. The company also hiked its quarterly dividend by 38% to $0.275 per share. This star performance within the struggling pack offered the stock over 8.1% gains post earnings. ALK has a Zacks ETF Rank #1, a Value and Growth scores of ‘B’ and a Momentum score of ‘A’. Should You Buy JETS? By now, one must have realized from the indicators that the mood in the airlines industry is upbeat. The sector is in the top 4% category of the Zacks Industry Rank at the time of writing, giving strong cues of the upcoming flight in the entire industry. However, as company-specific risks seem higher, investors might play the trend via basket approach to tap the entire potential of the space. And to do so, what could be a better option other than the JETS ETF? The $46.8 million-fund holds over 30 stocks in its portfolio and is concentrated on a few individual securities, as it allocates about 70% to the top 10 holdings. American Airlines (12.46%), Southwest Airlines (12.37%), Delta Airlines (12.13%) and United Continental (10.54%) are the top four elements in the basket. Alaska Air holds the ninth position in the fund with 3.74% weight. The product charges 60 bps in fees. Link to the original post on Zacks.com

Addressing Long-Term Goals During Short-Term Volatility

Assumptions about future returns are made every day by a wide variety of investors. These assumptions are often based on annualized returns that can mask tremendous amounts of performance variation. For instance, a simple blended portfolio consisting of 55% U.S. large-cap stocks and 45% intermediate U.S. Treasury bonds delivered an annualized return of 8.5% since 1926. However, since the start of that year, in 20% of rolling 10-year windows, a 55/45 blended portfolio failed to achieve a return of even 6%. We believe that the next 10 years may be a period where returns to a passive buy-and-hold balanced strategy are likely to come up short. Investors facing this likely reality have three options: 1. Lower their long-term return assumptions Return assumptions should represent good faith estimates of the likely long-term return on investment. While a lower-return assumption may be necessary for those with unrealistic expectations, others should carefully evaluate their investment approach to determine if there is a way to increase the odds of successfully meeting their objectives. 2. Raise their target allocation to equities However, the greater expected return from stocks versus bonds is also accompanied by greater expected volatility. Greater volatility can result in greater drawdowns that can adversely impact the ability of some investors to meet more near-term objectives. 3. Embrace a flexible, active asset allocation strategy This may be the most realistic of the three alternatives. At any point in time, equity market returns are driven by one or more of the following factors: fundamentals, valuation, and sentiment. As active managers, we prefer a framework that seeks to identify regimes where the risk of sustained capital loss (i.e., a bear market) is high, or conversely market environments that strongly favor owning stocks. Such a framework also acknowledges that the market is likely to go through periods where neither regime is overwhelmingly likely. That last environment is where we find the U.S. stock market at the outset of 2016. While valuations are somewhat elevated, the U.S. economy remains far from overheating, and sentiment is anything but speculative today. In an environment such as this, investors can be rewarded by taking advantage of market volatility to increase their exposure to attractively valued and well-positioned markets/sectors/companies. Nevertheless, successful asset allocation is not just about what an investor owns, it also is about what one chooses not to own. Investors in passive strategies must own whatever allocations make up the index, regardless of the merit of those investments. This can prove disastrous when an index becomes heavily-skewed toward overvalued segments of a market. Valuations suggest that over the next 10 years, a static asset allocation approach is likely to fail to meet the long-term return targets of many investors. The reason is simple – starting valuations both in equity and fixed income are not priced to deliver the returns that history has led investors to expect. In a low-return world, investors can ill-afford to operate without what we believe is the most effective tool for increasing the likelihood of achieving their long-term return objectives: an active approach to asset allocation. History suggests that the volatility of the opening trading days of 2016 is hardly unprecedented. Active asset allocation provides investors the opportunity to respond to these developments and shift the odds of long-term success more in their favor.