The travel industry has been one of the more high-profile investment themes of the pandemic. That’s because many advisors and investors are looking to capture the beaten-up sector’s upside given the pent-up demand from tourists and business travellers.
The challenge over the past 18 months, though, has been uncertainty regarding just when that dam will finally burst, leading to a deluge of growth and profitability.
“We’re in a bit of a limbo period in which we’re almost through this pandemic, though not quite, and there remains elements of risk associated with it,” says Paul MacDonald, chief investment officer at Oakville, Ont.-based Harvest Portfolios Group Inc.
He notes how the Omicron variant of COVID-19, and the Delta variant before that, have caused significant volatility for the varied sector, which includes airlines, cruise lines, casinos, online booking companies, and hotels and resorts.
Travel – arguably the industry that the pandemic hit the hardest – has lagged the broader market.
Consider the performance of the Solactive Travel and Leisure Index NTR, which covers the 30 largest publicly traded companies in the sector. The index decreased more than 50 per cent at the start of the pandemic, and remains down a fraction from its pre-pandemic levels.
In contrast, the S&P 500 fell about 30 per cent at the pandemic’s start, yet, it’s now up by more than 40 per cent from where it stood before the pandemic.
While the travel sector has had starts and sputters in recent months, “If you believe we will get past COVID-19, the travel sector has a lot of potential green shoots of growth,” says Michael Salisbury, portfolio manager with Strong Private Wealth at Raymond James Ltd. in Burlington, Ont.
Sector had shown significant growth
Indeed, prior to the pandemic the travel sector had been a growth hotspot in the market.
“Everything was ticking along very nicely until COVID-19 hit,” Mr. Salisbury says.
From late 2009 to February 2020, the Solactive index grew by 511 per cent compared with 281 per cent for the S&P 500.
“Pre-pandemic, these areas were performing exceptionally well, driven by accelerating expenditures on a per capita basis,” Mr. MacDonald says.
World Bank data that tracks international travel expenditures show that spending globally grew to more than US$1.55-trillion in 2019 from about US$577-billion in 2000. One factor has been an aging population that spends more on travel, particularly during early retirement, Mr. MacDonald says.
One challenge for more value-oriented investors is that the sector is subject to a lot of speculation, says Adam Hennick, investment advisor with Hennick Wealth Management at Research Capital Corp. in Toronto.
“Everyone is betting on when COVID-19 will end. So, you have to ask how much of that is already priced into those stocks?” he says.
Greater exposure for less risk
One way to get exposure without taking on inordinate risk is an exchange-traded fund (ETF).
“It’s a much better way to play the theme than, for example, buying Royal Caribbean Cruises Ltd.’s stock RCL-N directly or any one hotel chain,” Mr. Hennick says. “With an ETF, you participate in several companies instead of just a few.”
A unique advantage of the ETF is its design, allocating exposure to all areas of the travel sector. That’s unlike other options that are narrower in focus, Mr. MacDonald says.
“Putting all these subsectors together offered a nice yin and yang performance through the pandemic,” he says.
For example, Mr. MacDonald says booking companies fared well during much of the pandemic, while cruise lines and airlines have had more volatile performance through the emergence of each COVID-19 variant.
As a global fund, the Harvest ETF holds well-known names such as Air Canada AC-T, JetBlue Airways Corp. JBLU-Q, Hilton Worldwide Holdings Inc. HLT-N, Caesars Entertainment Inc. CZR-Q, Expedia Group Inc. EXPE-Q and Royal Caribbean. In all, the portfolio includes 30 large-cap publicly traded companies all tracked in the Solactive index, the fund’s benchmark.
While allocations are cap-weighted, each position is also subject to a maximum weighting of 10 per cent of the portfolio. That avoids risks of overconcentration, Mr. MacDonald says.
The Harvest ETF, which launched in early 2021, has a one-year return of about 7 per cent (as of Jan. 17), reflecting in part the stop-and-start performance of the sector.
Current challenges aside, Mr. MacDonald’s expectation is that the fund will capture the travel industry’s upside as the pandemic weighs less on tourism and business travel in the next several months.
“Our view is that the trends in place pre-pandemic are not only going to come back to what they were in 2019, but that people will be travelling more in the long-term because of this experience with COVID-19,” Mr. MacDonald says.
Advertising feature produced by Globe Content Studio with Harvest Portfolios Group. The Globe’s editorial department was not involved.