CHARLOTTE, N.C. -- Claymore Securities may look smart launching an airline ETF just as many analysts are eyeing the sector as one of the few likely to produce profits in 2009.But in reality, for Illinois-based Claymore, profits have nothing to do with selecting airlines as the focus for the firm's 34th exchange-traded fund -- the Claymore/NYSE Arca Airline ETF ( FAA). Rather, it is volatility, not profits, that creates a demand for the frequent, convenient trading provided by an ETF. "We don't think people are going to use this to invest long term in airlines," said Claymore President Christian Magoon in an interview. "This is a trading product by which to quickly and to conveniently participate in what has historically been a volatile sector, to allow traders to move in and out minute by minute and intraday." To demonstrate just how volatile airline shares can be, Magoon noted that over the past nine years, returns at the Morgan Stanley Capital International World index, a common benchmark for global stocks, have drifted as low as 17% to 18% in down cycles. In their down cycles, airlines have drifted as low as 35% to 38%. In fact, when Claymore began working on its airline index fund about six months ago, oil prices were close to their all-time high of $147 a barrel, reached in July. "Airlines didn't look appealing six months ago," Magoon noted. "We're lucking out this year. "But from our standpoint, we're just trying to get people exposure to airlines. As for the specific fundamentals of the business, we don't have a viewpoint on that one way or the other," he said.
Preceding the creation of the ETF, the New York Stock Exchange's Archipeligo Holdings division created the NYSE Arca Global Airline Index (AXGAL). The index, and the fund, include 25 airline stocks, weighted by market cap. While the fund is 70% domestic and 30% international, just 11 of the holdings are domestic carriers. The initial weighting formula allocated 15% to each of the top three domestic holdings, by market capitalization. They are Continental ( CAL), Southwest ( LUV) and AMR ( AMR). On the international side, the top three holdings each initially accounted for 4.5% of the fund. They are Lufthansa, Singapore Airlines and Air France. Despite including some of the best-known brand names in the world, the fund has not one single large-cap stock, defined as having a market capitalization above $10 billion. Magoon said. Airlines worldwide are either medium-cap or large-cap stocks. Also contrary to a common perception, Magoon noted that airline shares do not historically trade in inverse proportion to oil prices. In other words, it is not always true that because oil prices decline, airline shares rise, although this is what happened on Monday. But between 2001 and 2008, as oil prices have fluctuated, the reverse correlation in airline shares has been only about 25%, Magoon said. "Over the long term, airlines have other costs such as labor, and exposure to other things that move the stocks upward or downward," such as terrorist events or the SARS epidemic, he said. Claymore's ETF will be a positive for the airline industry, said veteran analyst Helane Becker of Jessup and Lamont. "The market could use this," she said. "It's a way to get exposure to the airline industry without necessarily having to pick stocks."
Becker said airlines, more than other industries, move in tandem, so volatility will indeed be high. Despite increasing fears about the potential for sharply reduced demand, she continues to expect the industry to be profitable this year, a result of lower energy prices, economic stimulus efforts by President Barack Obama and the potential for further consolidation. Nevertheless, in its first day of trading, the fund traded down about 1.5% to $23.83 on volume of a few thousand shares.