2 ETFs to Navigate Turbulent Airline Industry

NEW YORK (TheStreet) -- With experts forecasting turbulence, investors with exposure to the airline industry should fasten their seatbelts.

On Wednesday, the International Air Transport Association presented a sour outlook for the airline industry. Citing factors including continued economic woes from Europe, the agency expects profits to take a heavy hit in 2012.

The cloudy outlook from the IATA is just the most recent factor to weigh on the airline industry in the final weeks of 2011. In late November, investors were also greeted to news that American Airlines parent, AMR, had become the latest member of the U.S. airline industry to file for bankruptcy protection.

Factors including the IATA's concerning predictions and AMR's bankruptcy have helped to cap an already turbulent year for this corner of the transportation industry. Year to date, the Guggenheim Airline ETF ( FAA) is off approximately 30%. Comparatively, the broad-based iShares Dow Jones Transportation Average Index Fund ( IYT) has dipped less than 3% since the start of 2011.

This dismal performance is likely enough to dissuade many from trying their luck here. It is not the only concerning issue with the product, however. The troubled fund also struggles with liquidity. At this time, the fund's average daily trading volume stands at a paltry 6,700.

While the dedicated airline ETF should be avoided, there are other ways ETF investors can take to the skies. For example, aerospace and defense funds like iShares Dow Jones U.S. Aerospace & Defense Index Fund ( ITA) and PowerShares Aerospace & Defense Portfolio ( PPA) are worth keeping on the radar.

Rather than targeting names like United Continental ( UAL), Southwest ( LUV) and Delta ( DAL), these funds are designed to target the companies responsible for producing aircrafts and providing the industry with supplies. Top holdings include names such as Boeing ( BA), United Technologies ( UTX), Goodrich ( GR) and General Dynamics ( GD).

This corner of the industrial sector has not been immune to headwinds. On the contrary, news of the Congressional supercommittee's failure to reach a suitable budget reduction agreement has raised alarms. As many have noted, under a sequestration scenario, half of the required $1.2 trillion in cuts would come from security programs. For companies like Boeing and Lockheed Martin which rely heavily on government contracts, the impact could be devastating.

In the face of these fears, however, ITA and PPA have managed to largely brush off weakness. Over the past month, ITA has jumped by over 1%. PPA, meanwhile, has seen losses but the fund's decline has been less than 1%.

Continued budget wrangling could pose and issue for aerospace contractors down the road. Luckily for investors, both ITA and PPA are well positioned to weather a potential upheaval. Ample exposure to after-market suppliers will ensure stability if companies like Boeing and Lockheed are forced to pare back their production schedules.

As analysts have noted, the products and services provided by companies such as Goodrich, Precision Castparts ( PCP) and Rockwell Collins ( COL) will become increasingly sought after as the government and companies work to keep older aircrafts in service.

When it comes to taking to the skies, I encourage investors to skip the troubled airlines. The aerospace and defense industry is a better bet here.

Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management did not own any equities mentioned.

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