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Airline ETF Is Good Value Now

By Michael Johnston of ETF Database

When Iceland's Eyjafjallajokull volcano erupted last week, few investors imagined that the ash spewing forth would cause fruit to wilt in Kenya, mozzarella to rot in Italy and flowerless weddings in New York City.

The ripples throughout the world from the most recent act of nature served as a reminder of the extent to which global economies are now intertwined.

But while companies in all corners of the global economy were affected by this most unexpected event, the biggest disruptions were felt closer to the volcano. It is estimated that the global airline industry lost more than $1 billion over the past week, the result of more than 60,000 flight cancellations as regulators refused to grant permission to fly anywhere near the potentially hazardous ash cloud. The prolonged service disruption presents yet another hurdle for an industry that has been at the brink of disaster multiple times in recent years.

The Claymore/NYSE Arca Airline ETF (FAA) has been one of the best performing equity ETFs since markets bottomed last year, gaining more than 250% since March 2009 (see FAA's historical performance).

But the stubborn ash cloud from the Icelandic volcano spurred a sharp pullback. FAA, which tracks the NYSE Arca Global Airline Index, lost almost 5% between the first announcement of travel restrictions on Thursday and the end of trading on Tuesday. (Despite the turmoil caused by allegations of fraud at Goldman Sachs (GS), the broad markets were generally flat over the same period). It's worth noting that FAA's largest holding, Southwest Airlines (LUV - Get Report), flies mostly domestic routes, and as such hasn't seen its operations affected significantly by the ash. LUV, which makes up about 15% of FAA's assets, was actually up about 1.5% during the recent slide in the ETF, meaning that the fund's other components experienced large declines.

The financial impact of the recent flight blackout on the airline industry was both material and adverse, a development that will likely be reflected in second-quarter earnings. But the idea that a a few days of canceled flights erased 5% of the airline industry's value is irrational. The beating taken by FAA over the last five days seems to be a bit overdone, especially when given the momentum airlines were carrying before the recent stumble.
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