With the latest wave of the COVID-19 pandemic subsiding and vaccination rates rising, economies across North America are reopening. In the United States, retail sales have already jumped to record levels, as Americans enthusiastically return to malls and car lots. Canada is lagging, but there are plans for a full reopening in the coming months.
Stock markets have climbed to record highs in anticipation of the reopening boom. Still, some market analysts believe stocks have more room to run. We asked some experts for their views on ways to play the postlockdown boom through exchange-traded funds.
Todd Rosenbluth, director of ETF and mutual fund research, CFRA
Mr. Rosenbluth says that as North America opens up further, people will return to spending to go to restaurants, attend live events and travel. To take advantage of this trend, he recommends the Invesco Dynamic Leisure and Entertainment ETF (PEJ-A), which has a management expense ratio (MER) of 0.63 per cent and has returned 33 per cent year-to-date and 66 per cent over the past year. (All data from Morningstar as of June 4).
The ETF includes a range of consumer-related companies such as the Walt Disney Co., Eventbrite Inc., McDonald’s Corp. and Expedia Group Inc.
Leisure air travel has begun recovering in the United States, and business travel is also expected to rebound – though perhaps not quite to prepandemic levels. As a way to benefit from the recovery, Mr. Rosenbluth recommends the U.S. Global JETS ETF (JETS-A), with an MER of 0.60 per cent. The fund, which is up 18 per cent so far this year and 38 per cent over the past 52 weeks, owns the largest U.S. airlines such as Southwest Airlines Co., United Airlines Holdings Inc., American Airlines Group Inc. as well as Air Canada and airplane manufacturers such as General Dynamics Corp. “While it’s focused on just one industry, there’s security-level diversification that adds to its value,” Mr. Rosenbluth says.
John Hood, president and portfolio manager, J.C. Hood Investment Counsel
Mr. Hood says there are several U.S.-based ETFs that focus on stocks that should benefit from the expected postlockdown spending surge. The two he cites are the Consumer Discretionary Select Sector SPDR Fund (XLY-A) with an MER of 0.12 per cent, and the Vanguard Consumer Discretionary ETF (VCR-A), with an MER of 0.10 per cent. Both ETFs have similar top holdings including Amazon.com Inc., Tesla Inc., Home Depot Inc. and McDonald’s Corp., but the Vanguard fund has more diversification with 297 holdings, compared with 64 for the SPDR fund. Mr. Hood notes both funds trade at high price-to-earnings multiples and have been outperforming the S&P 500. “There are no bargains here,” he says. XLY is up 7 per cent so far this year and 35 per cent over the past 52 weeks, while VCR has increased 10 per cent year-to-date and 55 per cent over the past year.
Another option Mr. Hood highlights is the First Trust Consumer Discretionary AlphaDex Fund (FXD-A), with an MER of 0.63 per cent. It has returned nearly 20 per cent so far this year and 53 per cent over the past year. Mr. Hood notes this ETF is much smaller than other U.S. consumer discretionary ETFs and has higher fees but has very different, smaller-cap holdings. Some of its top holdings include Foot Locker Inc., Toll Brothers Inc. and Mattel Inc.
Lois Gregson, senior analyst, ETF analytics, FactSet Research Systems
Ms. Gregson also believes consumer discretionary funds are a good bet for investors who believe the economy is set to rebound postpandemic and her firms’ pick is VCR, cited by Mr. Hood. She points to some of the recently launched thematic ETFs in the space for a more specialized view on consumer stocks.
For investors who believe it may take some time for the reopening to be fully reflected in stocks, Ms. Gregson points to the iShares MSCI USA Minimum Volatility Factor ETF (USMV-A), which provides exposure to U.S. stocks with potentially less risk. Historically, the fund has declined less than the market during downturns. The ETF has an MER of 0.15 per cent and has returned about 7 per cent year-to-date and 20 per cent over the past year. Some of its top holdings include Microsoft Corp., T Mobile Inc. and Waste Management Inc.
Nick Piquard, vice-president and portfolio manager, Horizons ETFs
Mr. Piquard has a somewhat contrarian view on how to play the reopening. “I think inflation is the name of the game here,” he says, and points to commodities as a natural hedge against rising prices. In particular, he sees energy companies as some of the main beneficiaries. “Consumers have been sitting at home waiting to take a vacation. This could lead to a recovery in energy demand as consumers start to travel again, whether it’s road trips or flights,” he says.
Canadian energy stocks remain cheap relative to historic levels, even after the bounce back over the past year, he says. One of the ETFs he likes is the Horizons S&P/TSX Capped Energy Index ETF (HXE-T) with an MER of 0.27 per cent and year-to-date return of 50 per cent and has risen 67 per cent over the past 12 months. For those looking for yield, there’s also the Horizons Enhanced Income Energy ETF (HEE-T), which uses a covered-call strategy on an equal-weighted basket of Canadian energy names. It has an MER of 0.85 per cent and has also returned 50 per cent so far this year and 73 per cent over the past one year.