Ready for take-off: Is now a good time to invest in a travel ETF?
Travel is making a comeback. The sector was hit hard by the COVID-19 pandemic, with many hospitality, tourism and transportation companies losing money or closing down. Now, as the world emerges from the global health crisis, the travel sector’s future is looking bright, a view supported by improved economic indicators specific to the sector.
According to recent data from the United Nations World Tourism Organization (UNWTO), over 900 million tourists travelled internationally in 2022—double the number recorded in 2021, though still just 63% of pre-pandemic levels. For 2023, the UNWTO forecasts further recovery, to between 80% and 95% of pre-pandemic levels.
Travel and tourism is one of the largest sectors of the global economy: Prior to the pandemic, in 2019, it contributed $9.63 trillion to global GDP (all figures in U.S. dollars). In 2020, with much of the world under lockdown, that figure fell to $1 trillion, but it rebounded to $5.81 trillion in 2021—and it’s expected to keep rising.
Signs of growth: Is there money to be made in travel industry stocks?
Things are looking up for the travel sector, for several reasons. The biggest one is that people are returning to their pre-pandemic travel patterns—even cutting back on other types of spending in order to splurge on holidays, according to RBC’s Consumer Spending Tracker. Many of us are also in the mindset of “revenge travel,” booking big bucket-list trips to make up for lost time.
Travel industry observers point out other trends that could fuel the sector’s long-term growth:
- Baby boomer travel boom: As baby boomers—the generation born between 1946 and 1965—reach retirement age, they have more time and money to travel. Boomers are expected to travel extensively in the coming years.
- Demand for new experiences: Many Canadians, especially Millennials and Gen Z, are picking “experiences” over “things,” splurging on flights and hotels while spending less on goods, groceries, restaurants and new cars.
- The rise of travel tech: Technology is making travel planning more convenient. From booking flights and hotels to finding attractions, travellers can plan their entire trip on their smartphones. That’s helping to fuel the demand for personalized travel and customized itineraries.
- Growing LGBTQ2S+ market: The lucrative LGBTQ2S+ travel market has grown rapidly in recent years. Pre-pandemic, in 2018, LGBTQ2S+ travellers spent an estimated $218 billion, and they’ve become a key demographic in the industry.
- Exploring the great outdoors: Months of indoor confinement and lockdowns have given rise to strong demand for outdoor activities and nature-based tourism, creating a new source of revenue generation for travel companies.
- Destination weddings are back: Micro weddings are out and destination weddings are in, with market value expected to reach $54 billion by 2027.
- Work from anywhere: Flexible work arrangements have allowed more Canadians to relocate for a sun-soaked “workcation” or an extended stay abroad—and travel companies are catering to this new crop of digital nomads.
How to invest in travel companies
With the worst of the pandemic in the rear-view mirror, the industry is expected to rebound, offering investors opportunities to invest in quality names at “discounted” prices.
Investors could pick individual stocks of leading industry players or buy into mutual funds that package names from across travel, tourism and peripheral industries. However, a more cost-effective, lower-risk option could be to invest in travel-themed exchange-traded funds (ETFs), composed of a basket of leisure and business travel companies from a wide spectrum of industries.
One such ETF is the Harvest Travel & Leisure Index ETF (TRVL). This fund holds a diversified portfolio of large-cap companies that own or operate travel-related businesses, including airlines, cruise lines, hotels and booking platforms. TRVL offers exposure to a range of growth opportunities within the sector.
“We’ve seen the positive tailwinds in travel and leisure since before the pandemic, but we noticed that many Canadians who wanted travel exposure just bought a few airline stocks and called it a day,” says Paul MacDonald, chief investment officer and portfolio manager at Harvest ETFs. “TRVL was the very first ETF to offer a diverse array of travel companies to Canadian investors in a single ETF. It invests in airlines, cruise lines, hotels and resorts, casinos and the online booking companies like Airbnb that are opening travel up to so many people. These companies are all categorized in different sectors, but they share the same tailwind: People are travelling more.”
An index ETF, TRVL invests in 30 large-cap travel and leisure companies in North America, including familiar names like Hilton, Marriott International, Airbnb, Carnival, Air Canada and Delta Air Lines, among others.
Harvest recently launched another travel-focused ETF, the Harvest Travel & Leisure Income ETF (TRVI), which also holds the same diversified portfolio of large-cap travel companies, with the addition of monthly income.
As travel makes a strong comeback from the depths of the pandemic, these companies are well positioned to reap the benefit of the sector’s return to profitability.
Income generation in a travel ETF
Like many other Harvest equity income ETFs, TRVI employs a covered call writing strategy. This involves selling call options on the securities within the funds to generate higher income—a feature that may appeal especially to investors who are saving for retirement and concerned about ongoing economic uncertainty and stock market volatility.
What is a call option?
A call option is a contract that lets the buyer decide if they want to buy a stock from the seller at a certain price within a certain time period. The buyer pays a fee, called a premium, for this option, and the seller keeps the fee no matter what happens.
Covered call ETFs like TRVI offer the potential for increased cash flow and reduced portfolio volatility. Moreover, writing covered calls can be a tax-smart investment strategy, as the cash flow generated is considered capital gains, which are taxed at lower rates compared to dividend income. (Learn more about call option ETFs.)
“TRVI captures the same portfolio as TRVL but adds an income component that we saw many investors seeking,” says MacDonald. “Because we use an active call option strategy, we can actually monetize any short-term volatility in the travel space while giving investors long-term exposure to the growth prospects we see for travel.”
Investors should note that the income from covered call options sometimes means less market upside opportunity: If the underlying stock rises in value, the option holder will probably exercise their right to buy it, and the ETF will own less of it. For this reason, Harvest ETFs limits option writing to a maximum of 33% of its portfolio holdings.
Should you invest in a travel ETF?
Before buying a travel ETF or any other investment, it’s important to consider how it will fit into your overall investing strategy. A travel ETF may be a good fit for your portfolio if you’re able to take on a certain level of risk and want exposure to the travel industry rebound.
In addition to the appeal of investing in blue-chip travel and hospitality firms, there are several other benefits to consider, including diversification across a wider range of companies than you would get from buying individual stocks, potentially lower fees than investing in stocks or mutual funds, and higher income yields through covered call writing.
Read more about ETFs:
- 3 ways to recession-proof your RRIF
- Get paid to wait—is now an opportunity to invest in tech stocks?
- What does high inflation mean for your retirement savings?
- Best in show: How to find and invest in market leaders
This article is sponsored.
It is a paid article that may feature a partner’s product or service. It was produced by MoneySense’s editorial team with input from the partner.
The post Ready for take-off: Is now a good time to invest in a travel ETF? appeared first on MoneySense.
No comments