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Air travel chaos has been a headwind in recent weeks as airlines cancel and curb flights amid staff shortages and rising fuel costs.Nathan Denette/The Canadian Press

It has been a turbulent ride for the relatively new class of travel and leisure ETFs launched to capitalize on the world getting back to ‘normal’ after the havoc caused by COVID-19.

The sector’s fundamentals are considered to be strong given the significant pent-up demand coming out of pandemic lockdowns and other restrictions that curbed travel and boosted household savings.

Some travel ETFs were launched at the start of 2021 when the rollout of vaccines was expected to translate into a return to normal or higher levels of travel.

While travelling has picked up, the sector remains highly volatile. The pandemic is still a threat, alongside rising inflation that is taking a bite out of household budgets. Air travel chaos has also been a headwind in recent weeks as airlines cancel and curb flights amid staff shortages and rising fuel costs.

All but one U.S. travel ETF – the actively managed AdvisorShares Hotel ETF (BEDZ-A) – have underperformed the S&P 500 index, notes Tiffany Zhang, an ETF analyst with National Bank Financial in Toronto.

BEDZ, with US$6.9-million in assets and a management expense ratio (MER) of 0.99 per cent, includes top holdings such as Target Hospitality Corp., Marriott International Inc. and MGM Resorts International.

The ETF is down 13.3 per cent year to date, compared with a drop of between 17 and 28 per cent for other travel ETFs and a decrease of 17 per cent in the S&P 500. (All data from Morningstar as of July 27.)

The smaller drop for BEDZ is likely a reflection that hotels have been less affected by the travel chaos affecting airlines.

Meanwhile, the continued uncertainty among airlines has already claimed a victim: the SonicShares Airlines, Hotels, Cruise Lines ETF (TRYP-A), which was delisted in July – barely a year after it was introduced as the first “pure-play” travel ETF.

“It did not get a lot of flows and it underperformed this year,” Ms. Zhang says.

For Canadian investors, there is one homegrown travel ETF, the Harvest Travel & Leisure Index ETF (TRVL-T), which provides broader sector exposure to the sector than U.S. funds in the space.

TRVL, which has $139.6-million in assets and an MER of 0.63 per cent, holds 30 travel-related companies such as airlines, hotels, cruise operators, casinos and online booking. Some of its top holdings include Booking Holdings Inc., Hilton Worldwide Holdings Inc. and Southwest Airlines Co. The fund has dropped 20.4 per cent so far this year.

“There is really nothing in the marketplace that provides exposure to a diversified portfolio of these stocks,” says Paul MacDonald, chief investment officer and portfolio manager of Toronto-based Harvest Portfolios Group. “There are sector areas such as funds that cover airlines or hotels, but really nothing that encapsulates all five of the core travel-related sectors that we do.”

Harvest’s passively managed fund launched Jan. 7, 2021, and quickly attracted assets from investors expecting a solid bounce back for the travel and leisure industry.

As with many thematic funds, TRVL has had a bumpy ride as the economy struggles to emerge from the pandemic, rising inflation and energy prices.

TRVL’s performance “has been not dissimilar from the broader recovery; it has been generally quite volatile and very sensitive to shorter term indicators,” Mr. MacDonald says.

Still, the Harvest portfolio manager sees signs of a rebound in international travel and the continued interest in travel among older, more affluent consumers as well as in business travel.

“The leisure traveller is now travelling internationally,” he says. “And the other part that was missing in all of 2021 and is starting to come back, is the corporate traveller. It is very important because it is a higher-margin business.

“So the demand side of the equation is absolutely still intact and has been recovering and starting to accelerate both on volume and on increased value whether that is room rates or flight rates.”

He concedes that limiting factors remain, notably high inflation, fears of a recession and higher fuel costs for airlines.

Fund analysts are united in the belief that thematic funds such as travel ETFs are extremely volatile and should not be a core holding in a typical portfolio.

“In July, the outlook remains uncertain; that being said, valuations look attractive and airlines are making money again despite the rise in fuel prices,” says Neena Mishra, director of ETF research with Zacks Investment Research in Chicago.

“So, if you want to take a look, maybe a small allocation makes sense.”

One to consider is the only pure-play U.S. airline ETF, the US Global Jets ETF (JETS-A), which charges an MER of 0.6 per cent and has a whopping US$2.5-billion in assets. It has dropped 17.1 per cent year to date. Some of its top holdings include American Airlines Group Inc., Delta Air Lines Inc. and United Airlines Holding Inc.

Another option is the diversified Defiance Hotel, Airline & Cruise ETF (CRUZ-A), which charges 0.45 per cent and has US$38-million in assets. It has fallen by 23.4 per cent so far this year.

Other options include the ETFMG Travel Tech ETF (AWAY-A) with an MER of 0.75 per cent and US$194.1-million in assets. The ETF is down 28.6 per cent year to date.

Launched in February, 2020, AWAY has performed worse than other travel and leisure funds because it has a heavy technology component with a heavy weighting in online booking companies, such as Trip.com Group Ltd. and Airbnb Inc.

Finally, there is the ALPS Global Travel Beneficiaries ETF (JRNY-A), which charges 0.65 per cent and has US$11.5-million in assets. Some of its top holdings include Boeing Co., American Express Co. and The Walt Disney Co. The ETF is down 19.2 per cent year to date.

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