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Royal Caribbean Group, which is included in Harvest Travel & Leisure ETF, will set sail to its newest ship, Odyssey of the Seas, from Israel in May, with all passengers and crew vaccinated against COVID-19.Handout

Vacationing in Italy’s Tuscany region, gambling in Las Vegas casinos, or taking a luxury Caribbean cruise may not be top of mind for many Canadians still facing lockdowns and travel restrictions amid the COVID-19 pandemic.

But the stock market doesn’t reflect the economy’s overall health. That’s why many travel, leisure, and entertainment stocks – as well as exchange-traded funds (ETFs) focusing on this theme – have rallied from a year ago on bets of a post-pandemic recovery now that a coronavirus vaccine roll-out has begun.

“It’s investor anticipation that things will come roaring back [and return to normal],” says Daniel Straus, director of ETFs and financial products research at National Bank Financial Inc. in Toronto.

These stocks could still climb higher if one assumes that this past year of lockdowns, globally, will unleash a wave of “pressure-building, pent-up demand” by consumers for vacation travel and entertainment, Mr. Straus says.

However, investors should be cautious playing a re-opening trade given that some names and related ETFs are back to pre-pandemic levels, he says. “It’s okay if they have some play money or risk capital to trade around the headlines.”

Using thematic ETFs for a travel recovery – while less risky and easier than trying to pick winning stocks – should be a shorter-term, tactical bet as opposed to a core holding in an investment portfolio, he says.

“The stock market is a prediction engine,” Mr. Straus adds. “Given the recovery that we have seen in the stock prices, it may well be that the prediction has been discounted to the present.”

Still, investor interest in this theme has been rising, judging by money flowing into the new Canadian-listed Harvest Travel & Leisure ETF TRVL-T, which has amassed $80.4-million in assets under management (AUM) as of Feb. 28, only six weeks after its launch, he says.

“[The ETF] increased in price by 26.3 per cent in February alone, while collecting $66-million in inflows. This suggests that investors are betting on the travel industry to make a resurgence if the pandemic shows signs of ending in the coming few months,” Mr. Straus says.

The Harvest ETF tracks an index of 30 large-cap North American companies involved in the airline, hotel, cruise line, casino, and internet-travel marketing industries. It includes names such as Air Canada AC-T, Marriot International Inc. MAR-Q, Royal Caribbean Group (formerly known as Royal Caribbean Cruises Ltd.) RCL-N, Caesars Entertainment Inc. CZR-Q, and Booking Holdings Inc. BKNG-Q.

But investors should also look under the hood on thematic ETFs to ensure they get exposure to the stocks they want because the holdings, as well as fees, can differ widely, he says.

For example, U.S.-listed Invesco Dynamic Leisure and Entertainment ETF PEJ-A owns about 30 stocks, including Hilton Worldwide Holdings Inc. HLT-N and Penn National Gaming Inc. PENN-Q that are also in the Harvest ETF.

However, the Invesco Ltd. ETF’s 30 holdings don’t include airline or cruise line companies. It does hold names in the restaurant and entertainment industries, such as Walt Disney Co. DIS-N, McDonald’s Corp. MCD-N, Live Nation Entertainment Inc. LYV-N, and Fox Corp. FOX-Q.

The Invesco ETF, which launched in 2005 and has about US$2.2-billion in AUM, charges a management expense ratio (MER) of 0.63 per cent. The Harvest ETF is cheaper, with a 0.40-per-cent management fee, and an MER expected to wind up between 0.46 per cent and 0.50 per cent, Mr. Straus says.

A glimmer of hope that travel could return to normal stems from plans by Royal Caribbean for its newest ship, Odyssey of the Seas. It’s set to sail in May from Israel with all passengers and crew over age 16 vaccinated against COVID-19.

Some investors asked about a cruise-line ETF when this sector’s shares were punished a year ago, but there isn’t one, Mr. Straus says. Other than the new Harvest ETF, “no other travel ETF holds Royal Caribbean as far as I can tell.”

A bet in shares of Royal Caribbean a year ago would have paid off in spades. Its stock has surged to the mid-US$90-range recently from a low of about US$20 in March, 2020. Still, it hasn’t hit its pre-pandemic high of around US$135 a share.

Investors who want exposure to airlines – another travel-industry sector hit hard by COVID-19 - can do so through U.S. Global Jets ETF JETS-A, says Todd Rosenbluth, senior director of ETF and mutual fund research at New York-based CFRA Research.

The ETF’s 39 stocks include names, such as Southwest Airlines Co. LUV-N, Delta Air Lines Inc. DAL-N, United Airlines Holdings Inc. UAL-Q, and Alaska Air Group Inc. ALK-N, which also have “buy” ratings from CFRA Research’s stock-analyst team, Mr. Rosenbluth says.

“We think there is still more room to go for airlines in particular,” even though many of them have seen their stocks start recovering, he adds.

On the other hand, ETFMG Travel Technology ETF AWAY-A, which tracks technology-focused companies in the global travel and tourism industry, benefits from consumers booking trips and ground transport and accommodation once they arrive at their destination, he says.

This ETF owns companies involved in travel bookings, ride-sharing, travel-price comparison, and travel advice. It owns names, such as Tripadvisor Inc. TRIP-Q, Airbnb Inc. ABNB-Q, Expedia Group Inc. EXPE-Q, Uber Technologies Inc. UBER-N, and Facedrive Inc. FD-X.

This ETF, which launched just before the market tanked a year ago, fell to less than US$12 a share before surging to the US$32-range recently. It has not only recovered but has also become popular in terms of fund flows, he says.

Investors who want to play the embattled casino industry can do so through Vaneck Vectors Gaming ETF BJK-Q, but it also has exposure to online sports betting, too, Mr. Rosenbluth says. It holds names, such as Las Vegas Sands Corp. LVS-N, Penn National Gaming, Caesars Entertainment, and MGM Resorts International MGM-N.

“CFRA Research has hold recommendations on Las Vegas Sands and MGM Resorts,” he adds.

Nevertheless, there’s still risk in playing the travel and leisure theme if the economy does not recover quickly, not enough people get inoculated with a vaccine, and fewer people travel than expected, Mr. Rosenbluth warns.

“There is still going to be people who are hesitant to get on an airplane to travel – even if they are vaccinated,” he says. “This is an optimistic trade.”

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