Airline ETF Serves as Proxy for Oil, Economy

This brings up an interesting point about the launch of the fund. Claymore President Christian Magoon was on CNBC to talk about FAA and, unlike most fund launch interviews, there was no attempt to create a bullish case for the airlines. Magoon pointed out that there has been a lot of volume and volatility in airline stocks, and Claymore felt this signaled demand for a vehicle to access the industry that did not take (much) single-stock risk. I'm impressed by the forthrightness of that reasoning.

If we conclude that FAA is more of a trading vehicle, that calls into question how exactly to use FAA. Claymore's fact card mentions that the back test for the NYSE Arca Airline Index has a negative correlation to light sweet crude. An aggressive trader bullish on oil could buy FAA as a hedge instead of an inverse ETF which could bypass the daily compounding effect that has been such a popular topic in the past few weeks.

FAA could also be viewed as a proxy for the early phase of an economic expansion. XAL dramatically outperformed the S&P 500 in the earlier stages of the past two bull markets. The perception or reality of air traffic increasing when the economy starts to turn up is a pretty easy connection to make.

There are probably other uses for FAA, including simply wanting to own the airlines or speculate on the airlines one way or another. But more than any other sub-sector ETF I can recall, the case for using FAA would seem to be more about the fund being a proxy for something else entirely, which I view as a step up in sophistication.

Amex Airline Index's Long-Term Trend Yahoo Finance

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