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Speaker 1: Welcome to trillions. I'm Joel Weber and I'm Eric bel

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Speaker 1: Tunis Eric, I've lost track of time. Has it been

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Speaker 1: two months? Three months? What day of the week is that?

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Speaker 1: I don't even know? It's Tuesday. I know this because

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Speaker 1: I'm actually going away for a couple of days on Thursday.

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Speaker 1: So now I've got back into some degree of a calendar. Oh,

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Speaker 1: you've got like a countdown. You're you're going to travel somewhere. Yeah, man,

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Speaker 1: I'm I'm I'm I'm risking it. My dad lives in

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Speaker 1: the Panhandle of Florida, Miramar Beach. They opened the beaches

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Speaker 1: there a couple of weeks ago. He's lives by himself.

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Speaker 1: He's been going crazy. So I'm gonna bring my oldest son.

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Speaker 1: We're gonna fly down on on tickets that were a

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Speaker 1: third of the normal cost and then use that extra

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Speaker 1: budget to you know, eat like kings down there, go

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Speaker 1: to the beach. It's gonna be nice and hot and warm.

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Speaker 1: To be careful when we, you know, leave the house

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Speaker 1: through the you know, the airport and the airplane. But

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Speaker 1: we have masks, and you're braver than I am, my friend,

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Speaker 1: So you're going to the beach. And you're taking a

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Speaker 1: flight to Florida, which brings us to the theme of

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Speaker 1: this episode of Trains. Um, we're gonna speak with Frank Holmes,

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Speaker 1: the CEO of the E t F Jets, which I'm

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Speaker 1: really excited about because this E t F right now,

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Speaker 1: Eric's just there seems to be a ton of interest

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Speaker 1: in it, right yeah, you know, Um, I'm calling it

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Speaker 1: Jet Sanity because it reminds me of Lynn Sanity. Remember

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Speaker 1: that little point guard Asian point guard from like two

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Speaker 1: thousand twelve who came off the bench and like schooled

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Speaker 1: Kobe Bryant and like took over New York City for

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Speaker 1: about two months. This is yeah, this is the same thing,

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Speaker 1: except for an E T F. Let me give you

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Speaker 1: some numbers on jets. Jets went like years with a

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Speaker 1: flow here and there over the course of a year.

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Speaker 1: Then it goes down like right during the crisis. Since

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Speaker 1: it went down, it's attracted a lot of people looking

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Speaker 1: to play a rebound. But here's the stats that I'm

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Speaker 1: just so blown away by. It's taken in flows for

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Speaker 1: forty eight forty nine straight days, which is unheard of.

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Speaker 1: Vanguard does that on occasion, and that's Vanguard. This is

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Speaker 1: a theme et F. It's also taken in six and

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Speaker 1: sixty three million. This fund had maybe twenty million UM

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Speaker 1: three months ago, and so we compared it to other

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Speaker 1: theme ETFs when they quote caught fire like Robo, m

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Speaker 1: J and Hack, and those did nothing. They couldn't even

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Speaker 1: touch this amount of intensity in terms of a theme

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Speaker 1: ETF sort of like capturing the moment. So there's that,

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Speaker 1: and then there's the issue of all the people buying it.

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Speaker 1: A lot of them are likely retail investors who are

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Speaker 1: taken the other side of a trade for more and Buffett.

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Speaker 1: So you've got this David and Goliath trade going on,

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Speaker 1: Buffetts selling airlines, and you've got a lot of retails

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Speaker 1: saying no, it's to go up. And who will win

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Speaker 1: we don't know, but it's fascinating story. So I'm looking

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Speaker 1: at the Jets share price and it's basically been flat

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Speaker 1: until early February, and then all of a sudden it

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Speaker 1: starts to come down, and by March it has plunged

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Speaker 1: from about just around thirty dollars UM in the middle

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Speaker 1: of February to about twelve dollars in mid March. It's

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Speaker 1: sort of recovered and then has kind of come back

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Speaker 1: down and now it's aid about twelve dollars. That is

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Speaker 1: an epic, epic change, this time on trillions. Jet Sanity, Frank,

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Speaker 1: welcome to trillions. I gotta ask you, this has been

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Speaker 1: um clearly a weird stretch in the history of the world.

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Speaker 1: And you know you happen to be sort of like

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Speaker 1: lying in a cockpit of a plane that your business

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Speaker 1: model has been really disrupted. Here when did you get

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Speaker 1: a sense of how bad this might get? Well, you know,

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Speaker 1: I started this at this jet c t F five

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Speaker 1: years ago and that was almost where the where I

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Speaker 1: launched it with a flow started coming in massively and

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Speaker 1: it went nowhere. We went to a hundred millions shortly

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Speaker 1: right after we launched it, and then it went nowhere, sideways,

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Speaker 1: up and down. And it's interesting because you mentioned hack.

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Speaker 1: You know, Hack didn't really grow until Sony was hacked

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Speaker 1: and all of a sudden it woke up. And the

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Speaker 1: same thing happens with with the airline ETF. And we've

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Speaker 1: been doing webcasts now four times a year to r

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Speaker 1: A S only and family offices across the nation. We've

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Speaker 1: done about twenty of them over the past five years,

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Speaker 1: and it seems that this audience and specially heads funds

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Speaker 1: that play the airline industry, came into it. We know

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Speaker 1: that we've had a lot of small heads funds that

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Speaker 1: will go along the e t F to short the

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Speaker 1: stocks they don't like in the airline industry, and they

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Speaker 1: play it this way as they're sort of a pear's trade.

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Speaker 1: But it really accelerated as the fun fell. It's just

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Speaker 1: like hack. Hack had to get solely to get hacked

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Speaker 1: to all of a sudden being become aware, and that's

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Speaker 1: it took place here. When we analyze thematic e t

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Speaker 1: F s, we always say they need a shiny object

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Speaker 1: moment to get going, and you're right. Hack was the

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Speaker 1: sony hack. But the thing was that boosted cybersecurity stocks.

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Speaker 1: Same thing with Robo and MJ it was when they

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Speaker 1: went up. This is the rare case where the shiny

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Speaker 1: object was in the decline. And I'm guessing it's the

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Speaker 1: pe ratio. I think at one point the pe of

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Speaker 1: jets was like four or five. I think I looked

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Speaker 1: one time the only thing lower was Nigeria and the

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Speaker 1: coal industry. How much of the people are retail bottom callers?

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Speaker 1: They do you find versus sort of the hedge funds

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Speaker 1: at the beginning was predominantly heads funds that came in.

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Speaker 1: That's what we've we've found, uh, And what we would

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Speaker 1: hear from them is that they've done this research of

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Speaker 1: how long did it take for the airline industry to

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Speaker 1: rebound after the tech bubble after nine eleven, after Stars

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Speaker 1: after two thousand and eight nine That trough to peak,

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Speaker 1: Uh took from eight months to eighteen months, and was

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Speaker 1: from eight to a hundred percent return on your money.

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Speaker 1: And they were the first coming in looking for that bounce.

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Speaker 1: So I gotta ask because when you know, the last

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Speaker 1: time something that's significant really happened to the airline industry

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Speaker 1: was September eleventh, So here we are almost twenty years later.

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Speaker 1: Airlines clearly came back after that. UM, you had a

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Speaker 1: lot of institutional investors, including really noteworthy ones like the

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Speaker 1: Warren Buffets of the world after the financial crisis, who

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Speaker 1: came in and and you know, doubled down and made

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Speaker 1: a ton of money. But like the outlook for airlines

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Speaker 1: right now, like we could just be looking at a

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Speaker 1: lot of video conferences going forward and business travel that

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Speaker 1: never comes back. What's your outlook for the airline industry

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Speaker 1: from where you're sitting. So what is different is that

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Speaker 1: the Beltway agencies and party what they like to call

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Speaker 1: it sometimes and the and the administration are very cognizant

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Speaker 1: uh being slow to support the airline industry. The FA

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Speaker 1: came out and said one in fifteen jobs are related

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Speaker 1: to the airline industry. So it has a huge multiplying

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Speaker 1: effect in his crucial for the hotels are turned around.

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Speaker 1: Right now in Vegas, there's two hundred thousand empty rooms,

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Speaker 1: three thousand people have lost their jobs. Uh, something's got

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Speaker 1: to come back to get this multiplying effect of the economy.

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Speaker 1: So there's a much greater focus on revising the airline

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Speaker 1: industry based on previous studies. So that's the big game

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Speaker 1: changer here. And you saw from the cares Act how

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Speaker 1: fast they responded, even when the negotiations were quick, get

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Speaker 1: the money in maintained and get this industry turned around.

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Speaker 1: So I think that that's very positive, a constructive. The

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Speaker 1: other thing that's really interesting for me is is the

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Speaker 1: t s A publishes every day how many people they

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Speaker 1: for the four airports they tracked, UH people they've screened,

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Speaker 1: and that bottomed in April, we were almost doubled a

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Speaker 1: number of people flying every day, and and there's new

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Speaker 1: indicators coming out. And the other thing we've noticed is

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Speaker 1: Google trends, so looking for people looking for hotels and

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Speaker 1: looking for travel. That's picked up, and it's really searched

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Speaker 1: in Asia, which is sort of bottomed first. And I

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Speaker 1: think as we come back into this economy, we're going

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Speaker 1: to see more and more searches and and the sentiment,

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Speaker 1: the quant funds that you sentiment indicators are looking at

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Speaker 1: these two factors and they're plowing into it. That's what

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Speaker 1: we hear and what we see. Well, what's interesting to me.

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Speaker 1: You look at the holdings of this just so people listening, No,

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Speaker 1: it's in it. It's pretty obvious. Southwest Airlines, American Airlines,

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Speaker 1: Delta Airlines, United Airlines. Then you get down to things

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Speaker 1: like Spirit Airlines, um Quantas, So it's global, but it's

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Speaker 1: not just a market cap waited plane vanilla or just

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Speaker 1: simplistic uh construction. There's a couple of wirings in the

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Speaker 1: design of this e t F talk about how the

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Speaker 1: actual process works to put these holdings in there. Although

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Speaker 1: they seem obvious, it might not be exactly what people think. Right, Well,

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Speaker 1: thank you for that opportunity, because there was thousands of

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Speaker 1: hours put into this UH and to understand it is

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Speaker 1: it um. What we looked at is that there's lots

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Speaker 1: of bull of Zilian currencies and they can really be

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Speaker 1: a big drag or head wind or tail winds your performance.

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Speaker 1: So when we created this, we said, okay, what are

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Speaker 1: the most five most important factors. And each night it

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Speaker 1: would take eight hours ago and test a factor. And

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Speaker 1: then we tested on two systems. We tested on fact

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Speaker 1: Set and we tested on Bloomberg to go back over

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Speaker 1: ten years of data that see the robustness of which

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Speaker 1: factor is UH deals well with rise economy, following economy, kruptcies, etcetera.

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Speaker 1: So we distilled them down to five key factors. And

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Speaker 1: then we took a look at waitings and we found

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Speaker 1: that the four big guys that is American Airlines, Delta, H, Southwest,

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Speaker 1: and United they capture about eighty of the traffic UH.

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Speaker 1: And so the portfolio because of limitations of legatory limitations,

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Speaker 1: we said, have we maximized that? And we have four names.

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Speaker 1: Those names twelve percent each and each quarter we re

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Speaker 1: calibrate those. So that's forty eight percent of the portfolio

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Speaker 1: is really capturing the bulk of domestic travel. Now, when

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Speaker 1: we went to foreign names and went outside of that

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Speaker 1: like uh IS, we went one for twenty names, and

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Speaker 1: that mitigated this currency volatility and allows us to catch

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Speaker 1: those stocks that have the best factors like highest castle

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Speaker 1: returns to investor capital growth and revue last quarter or

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Speaker 1: four quarters gulth and castle last quo four quarters UH

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Speaker 1: and other factors they look at for traffic flow of

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Speaker 1: the humory passenger seats, who have et cetera UH, and

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Speaker 1: in between there in between those twenty names we have

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Speaker 1: that are foreign and the four big names, we have

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Speaker 1: a small group of names that are that are airports.

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Speaker 1: They can be airports, they can be Boeing Airbus UH,

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Speaker 1: they can be manufacturers, and that's where Hawaiian Airlines, Messa Airlines,

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Speaker 1: Spirit all these other sort of smaller airlines would show up.

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Speaker 1: But it's more of a consolidated name of those are

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Speaker 1: the most attractive, and each quarter we kicked them out

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Speaker 1: and we bring them in if they don't have the

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Speaker 1: highest cash board returns on invest in capital, if they're

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Speaker 1: not showing revue growing. So it's a dynamic approach each

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Speaker 1: quarter except for the big four names. So can you

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Speaker 1: walk us through sort of what happened this last rebalance,

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Speaker 1: because obviously that's in the middle of all of this,

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Speaker 1: like what what basically what opportunities did you guys see

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Speaker 1: and how did you really allocate things? Then give you

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Speaker 1: a really interesting part was that it was nine months

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Speaker 1: ago that Boeing was kicked out. Uh, and then all

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Speaker 1: the problems started coming. And you can see that showing

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Speaker 1: up in this this sort of quant approach quantum they

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Speaker 1: call it plunt of mentals, a combination of a quant

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Speaker 1: approach of factors and fundamental analysis um. And and so

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Speaker 1: we we see that rotation, and we see that we

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Speaker 1: own Messa populated. Then you have Hawaiian Airlines populated, Alaska populated.

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Speaker 1: How this quarter will take place? Uh, the March numbers

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Speaker 1: as they're slowly coming in. For the smaller names, we

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Speaker 1: don't have them all. All the financials are not published

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Speaker 1: to be able to give you how that change is

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Speaker 1: gonna happen this quarter. But there will be rotations, and

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Speaker 1: probably some of the biggest rotations will take outside of

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Speaker 1: the US where we have the twenty names. Remember this

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Speaker 1: is a this is a portfolio thirty three names, four

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Speaker 1: or forty eight percent and twenty or one. So it's

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Speaker 1: a very compressed portfolio. And our bogie is to beat

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Speaker 1: the New York Stock has change Global Airline Index. And

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Speaker 1: that's what we've done with this model, uh since we

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Speaker 1: launched it. And you know, let's obviously diversifying. You you

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Speaker 1: limit your upside, but you limit your downside, right, And

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Speaker 1: I think that's part of what people are interested in

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Speaker 1: when they buy an ETF over a single stock of

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Speaker 1: to do research on every single company UM. One question

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Speaker 1: I had just going back to the outlook on airlines,

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Speaker 1: is the price to earnings ratio on this is currently

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Speaker 1: nine and the price to earnings UM ratio for the

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Speaker 1: S and P is four. Right, the airlines do do they?

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Speaker 1: Do they need to even rebound fully, like let's say

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Speaker 1: they rebound halfway or six of the way. How much

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Speaker 1: could that validate the bottom calling or will therell be

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Speaker 1: bankruptcies which will take down the winners? How does that

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Speaker 1: play out if say we go to fifty or six

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Speaker 1: in the next two years not a hundred. I think

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Speaker 1: that the difference is is that there's such a focus

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Speaker 1: by the government both politicians and the agencies to get

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Speaker 1: this industry turned around for job creation and the multiplying

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Speaker 1: effect from jobs from the airline industry. I've never seen

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Speaker 1: it before to this degree. Um, so I think you're

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Speaker 1: going to get a higher bet, higher percentage of survivors.

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Speaker 1: One that's really that's sort of that the dust was Avianca.

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Speaker 1: Arianca uh will hurt United because of debt lendings and

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Speaker 1: clone dusting. But really Avianca couldn't get government support because

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Speaker 1: after they restructured their company over fifteen years ago, um,

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Speaker 1: they moved at the Panama So the government of Columbia

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Speaker 1: wasn't going to support them because they don't pay corporate taxes.

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Speaker 1: Everything's went through Panama, and that was the case that

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Speaker 1: it couldn't get government support. But that's not here. Here

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Speaker 1: we've got to menace government support. And the same thing

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Speaker 1: is in Europe. And the other part that you're seeing

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Speaker 1: here is like today, I believe the said starts buying

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Speaker 1: corporate bond ets, so they're trying to create a stability.

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Speaker 1: They're trying to get those rates down because what's happened

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Speaker 1: in that market you don't really see like the tip

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Speaker 1: of the iceberg. Oh, the ten year government bonds down

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Speaker 1: to sixty basis points. Money is cheap, Actually it's not. Um.

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Speaker 1: The cost of mezzanine funding shot from about a four

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Speaker 1: percent role to eight to eleven percent role. Every heads

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Speaker 1: fund that's in that space, every special lender in that

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Speaker 1: space automatic, it's just ratchet it up with all these covenants.

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Speaker 1: For two year money is eight percent, it's not thirty

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Speaker 1: basis points. And so the government I think is coming

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Speaker 1: in to try to stabilize corporate lending by buying these

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Speaker 1: A T s. That's very beneficial to the airline industry. Also.

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Speaker 1: So let me let me ask a slightly different way

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Speaker 1: than what do you think the worst case scenario might

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Speaker 1: be for jets? Are you thinking okay? So engage in

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Speaker 1: the bounce. The bounce has historically been from eight to

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Speaker 1: a hundred and so if you're embarrassed, really, Barris, we

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Speaker 1: think it is going to be a short lived one.

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Speaker 1: Or are you then you're gonna get sun from the lows? Uh?

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Speaker 1: If they do tork it up that year from now,

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Speaker 1: we could see doubles. You've you've you mentioned how hedge

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Speaker 1: funds were in early and looking at holders, I can

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Speaker 1: see that it was like there's a Canner Fitzgerald position

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Speaker 1: and invest Net Asset Management uh ubs is in their

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Speaker 1: degreen capital management. Those are you know, people who tend

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Speaker 1: to know what they're doing when they're getting in here,

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Speaker 1: and you know, can stomach volatility. Eric also points out

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Speaker 1: that number of robin Hood investors over the last two

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Speaker 1: months went from three hundred to twenty thousand. That's pretty significant,

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Speaker 1: wondering what it's like to suddenly have that many retail

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Speaker 1: investors show up well, as I think it would take

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Speaker 1: a look at an ecosystem and you've got to have

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Speaker 1: minnows with the tunas and these sharks and there's whales.

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Speaker 1: You need a complete ecosystem and uh and it's so

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Speaker 1: good to see that you have a bunch of minnows

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Speaker 1: because it does create a real dynamic market so that

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Speaker 1: you can see the volume trades millions of shares a day.

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Speaker 1: So I'm really thrilled about that UM and I think

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Speaker 1: that will continue. And I think that the idea that

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Speaker 1: more and these younger investors that are coming in through

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Speaker 1: Robin they're much more quick to take a look at

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Speaker 1: is the t S a data that comes with every

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Speaker 1: day tracking that putting moving averages on that data, or

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Speaker 1: look at Google trends, uh to all of a sudden

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Speaker 1: go along and trade in and out around those positions.

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Speaker 1: So I think it's great because it will attract bigger

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Speaker 1: institution money. I spend a lot of time tracking the

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Speaker 1: E T F industry, the winners and losers. To me,

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Speaker 1: it reminds me of Silicon Valley. Um, there's a lot

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Speaker 1: of innovation and but a lot of failure. Just talk

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Speaker 1: about take us into what it's just like to have

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Speaker 1: a hit, um, especially when it looked like, you know,

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Speaker 1: you go months and months with your literally an oblivion. Yeah.

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Speaker 1: I looked at it. It's like you're bobbing along and

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Speaker 1: it's averaging dollars a share, and then all of a sudden,

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Speaker 1: you know, you know, you have the pandemic hit. Yeah.

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Speaker 1: And once you get this kind of liquidity, even if

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Speaker 1: it goes up and some people take profits in your

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Speaker 1: assets maybe go down to three million, you've now become

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Speaker 1: the go to airline spots. So you're you've kind of

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Speaker 1: made it. But just talk about that catching fire. What's

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Speaker 1: that like to see inflows every day after months and

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Speaker 1: months where you saw maybe one day of inflows in

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Speaker 1: like a year and a half. Oh, it's a wonderful

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Speaker 1: feeling because I'm not have that elation since back in

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Speaker 1: two thousand and six, where we were getting fifty million

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Speaker 1: a day into our gold neutral funds. I went out

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Speaker 1: and say, okay, I've got to get into the ETS.

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Speaker 1: I have to get out of mutual funds, have to diversify.

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Speaker 1: And I picked an industry because I noticed Eric that

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Speaker 1: my flights were all of a sudden limited by you know,

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Speaker 1: five years ago, actually starting with ten years ago, the

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Speaker 1: options to fly had dropped, the cost of a ticket

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Speaker 1: went up. So I said, how do I make money

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Speaker 1: with this and launch a product? And there was no

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Speaker 1: other airline ETS, so launching it and and nurturing it along,

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Speaker 1: you know, it was. It was lots of love and

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Speaker 1: nurturing it because knowing uh, it took a couple of

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Speaker 1: years and all of a sudden, buffet starts recognizing the

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Speaker 1: high returns of investor capital. I think that the economy turns,

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Speaker 1: he comes back in. That's what I think it will

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Speaker 1: be the game changer. So much of UM the airline's

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Speaker 1: profitability has been rooted in sort of the business class

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Speaker 1: or first crap class traveler. If that uh segment doesn't

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Speaker 1: come back for a long time potentially because you know,

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Speaker 1: companies say, you know what, no more flying, you can

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Speaker 1: just do video conferencing. What does that mean for the

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Speaker 1: airline industry? Well, that would be tragic for the airline

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Speaker 1: indust is no doubt. But we we see the first

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Speaker 1: catering is the business. Business people can't wait to go

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Speaker 1: and sell and tell and you yell the products and sales.

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Speaker 1: You need to have sales. That's what drives revenue. And

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Speaker 1: human interaction is so important for that. And the Southwest airlines, Uh,

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Speaker 1: they see that something more, you know, more than a

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Speaker 1: third of their further passages or business, but sevent their

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Speaker 1: profits that have higher margins business. And we've we talked

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Speaker 1: about Warren Buffett earlier. What advice, Well, what would you

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Speaker 1: tell him if you could tell him anything right now? Oh,

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Speaker 1: I look up to this idol. I would just to

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Speaker 1: share with them that things will turn. He always talks

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Speaker 1: about betting on America UM and he's worried about ten

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Speaker 1: billion dollars. Then just go and plunk it down and

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Speaker 1: give lots of capital. Southwest it's it's by far, you know,

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Speaker 1: one of the best run airlines along with doubts up.

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Speaker 1: When you look at all these types of metrics, UM,

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Speaker 1: take them out. This is really fascinating. And you know,

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Speaker 1: congratulations on your against the odds hit product. UM. You

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Speaker 1: know it's only about one in every twenty or thirty

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Speaker 1: them ETFs gets to where you are with you know,

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Speaker 1: over a hundred couple hundred million, UM, but yours is

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Speaker 1: special because of the intensity. Again, it's reminds me of

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Speaker 1: it's the theme ETF equivalent of insanity. Frank, Frank Holmes,

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Speaker 1: thanks for joining us on Trillions. Thank you for the

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Speaker 1: opportunity sharing my story. Thanks for listening to Trillions. Until

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Speaker 1: next time. You can find us on the Bloomberg terminal,

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Speaker 1: Bloomberg dot com, Apple Podcast, Spotify, or wherever else you'd

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Speaker 1: like to listen. We'd love to hear from you. We're

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Speaker 1: on Twitter, I'm at Joel Weber Show, He's at Eric Baltunas,

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Speaker 1: and you can find Frank Holmes at Bulldog Holmes and

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Speaker 1: also at us Funds. This episode of Trillions was produced

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Speaker 1: by Magnus Hendrick. Francesca Levy is the head of Bloomberg

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Speaker 1: Podcast by