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Southwest Airlines and Delta Air Lines report that their cash burn rate is down dramatically and expect to be break-even by the first quarter of 2021. REUTERS/Lucy Nicholson/File PhotoLucy Nicholson/Reuters

Air travel is forecasted to decline by a crushing 85 per cent this year and global airlines will lose a collective US$84-billion, according to the International Air Transport Association (IATA), which also predicts that passenger traffic will not return to 2019 levels until 2024. That sobering outlook might push the airline industry to the bottom of everyone’s investing shortlist.

But a group of contrarians have added more than US$2-billion to the only North American-traded airline exchange-traded fund (ETF) since March, betting on a turnaround that is sooner rather than later.

“There’s never been a phenomenon quite like it,” says Frank Holmes, chief executive officer of U.S. Global Investors Inc. in San Antonio, Tex., which manages U.S. Global Jets ETF (JETS-A).

The ETF has had an extraordinary year in the midst of industry damage on a previously unimaginable scale. Although the ETF lost two-thirds of its value between January and March, it grew 60-fold thereafter to US$2.3-billion as of Nov. 16.

Frank Holmes, chief executive officer of U.S. Global Investors Inc. in San Antonio, Tex.Handout

The ETF largely holds airlines, including Air Canada (AC-T) and Cargojet (CJT-T), which make up 7.5 per cent of the fund. It also holds airports in Mexico, Thailand and Switzerland, an in-flight catering company and air-traffic control and ground-services companies.

Mr. Holmes spoke about the ETF and the industry’s prospects in an interview with Globe Advisor. He says he believes airlines are a good long-term value proposition for investors with patience and who can withstand turbulence.

Mr. Holmes grew up in Toronto’s Cabbagetown neighbourhood, studied economics at the then University of Western Ontario and moved to San Antonio in 1990 to head up U.S. Global Investors.

What is the investment appeal of the airline industry?

Research shows that after every major global economic scare, airlines pop back quickly. If you go back to the terrorist attacks of Sept. 11, 2001, a year later, airline stocks were up 80 per cent from their lows. If you look at the SARS outbreak in Asia in 2003, airline stocks were up 120 per cent from their lows a year later. And if you look at [the global financial crisis of] 2008-09, they were up 80 per cent six months after the March 2009 lows.

Isn’t this downturn different?

Yes, you need patience. You tend to get three or four waves of recovery. In previous cycles, from trough to peak, we’ve had three to four waves for airlines. You went up 50 per cent and pulled back 15 per cent. You went up 50 per cent and fell back another 15 per cent.

This time, the first big surge was in June, then a correction. Then, we had a second big surge and now it’s going sideways with COVID-19 cases rising again.

So why are you optimistic?

There’s a lot of positive emotional sentiment because of the recent vaccine news. So, I’m betting on growth in the global economy. Delta Air Lines Inc. (DAL-N) and Southwest Airlines Co. (LUV-N) report that their cash burn rate is down dramatically and they expect to be break-even by the first quarter of 2021. In the U.S., there’s going to be a bias toward positive news as Joe Biden takes over as the president.

It has certainly been a wild ride for U.S. Global JETS ETF this year.

Absolutely, unequivocally. At the beginning of March, 2 million people a day were flying from U.S. airports. By April 14, it was less than 90,000 people – about 4 per cent of that.

In January, our fund was worth about US$50-million. By the first week of March, it was less than US$35-million. Then at the bottom in April, money started coming in and it soared. It’s at US$2.3-billion now.

What was going on?

It was a phenomenon I hadn’t seen for 30 years, since baby boomers discovered mutual funds. It started with millennials. These young people like to travel. They know all the best airlines; which ones have the best ticket prices and at what times. While they were stuck at home, they experienced society by investing. They were coming in through discount brokerages like Robinhood Markets Inc., which allows you to buy stock in small lots like $500 or $1,000 at a time.

They were followed by bigger players, contrarian, tactical investors who saw an opportunity. This was happening in May and June just as Warren Buffett was liquidating his stake in airline stocks, saying it was a mistake. A week after he said, by the way, airlines surged.

How did your firm design the U.S. Global JETS ETF?

We built a model to capture the bulk of the U.S. domestic market and then allow for expansion.

About 40 per cent of the portfolio is in four airlines – what we call the four pillars – because they carry 65 per cent of all passenger traffic in America. Southwest, United Airlines Holdings Inc. (UAL-Q), Delta and American Airlines Group Inc. (AAL-Q).

At the beginning, they were 48 per cent of the ETF, but we’ve diversified.

Who is this ETF suitable for?

It was designed for growth-at-a-reasonable price investors. It still is. Airlines are still cheaper than railways and trucking businesses, but you have to be patient and you have to believe people will start flying again. A vaccine may be available sooner than anyone expected, which is highly supportive of airlines.

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter. This interview has been edited and condensed.