Flying The Friendly Skies

Published on Wednesday, 08 February 2012 16:52 Written by Todd Shriber

New York, February 8^th (TradersHuddle.com) – It may seem like a vexing proposition to some: West Texas Intermediate crude oil futures continuing to hover near $100 per barrel and soaring airline stocks. How does that happen? It’s a valid question to be sure, especially when each $1 increase in the per barrel price of oil costs the global airline industry $1.6 billion, but despite high oil prices (Brent futures are actually much higher than West Texas Intermediate), the Guggenheim Airline ETF (NYSE: FAA) was up over 23% year-to-date at the start of trading Wednesday.

That’s an arguably stunning performance for an ETF that tracks a sector grappling with high oil prices, lethargic economic growth in key developed markets, the bankruptcy of American Airlines parent AMR Corp. and the always looming potential for labor strife.

Maybe the Guggenheim Airline ETF has an advantage in that it is the only ETF devoted to the airline industry listed in the U.S. Direxion once sponsored a competitor, but that fund was shuttered last year after failing to provide any legitimate competition to FAA.

FAA has benefited in other ways. For starters, the index the ETF tracks did not provide large exposure to AMR before the bankruptcy filing, so what should have been terrible news for FAA given the size of American Airlines actually wasn’t too much of a stumbling block for the ETF. Second, the ETF devotes almost 49% of its weight to Delta (NYSE: DAL), United Continental (NYSE: UAL) and Southwest (NYSE: LUV). That trio is perhaps the strongest, financially speaking, of any group of U.S. carriers.

Also impressive is the fact that FAA’s bullish ways have continued even though the ETF’s country weight includes allocation to four Euro Zone countries, including two of the PIIGS (Ireland and Spain). Overall, the ETF offers exposure to 10 countries, but the U.S. is the dominant force here with an allocation of almost 73%.

Another catalyst that very could be driving FAA’s stout performance this year is the mere anticipation of more airline industry consolidation. This is often a "buy the rumor, sell the news" event, but there’s a very real chance some of FAA’s top holdings will move on some of the other noteworthy names in the fund. After all, consolidation is an often-used survival technique in the airline business and economies of scale are a great way of coping with high input costs.

Obviously M&A rumors are just that: Rumors and speculation. What probably isn’t speculation is the notion that if FAA breaks $34 on strong volume, there are even more upside friendly skies ahead for this ETF.

The vitals: FAA just turned three years old. The ETF is home to 22 stocks, an expense ratio of 0.65% and assets under management of almost $17.8 million.