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U.S. Global Jets ETF, which includes Air Canada stock, gives exposure to the airline industry that will benefit from a return to air travel once a successful vaccine for COVID-19 has been developed. THE CANADIAN PRESS IMAGES/Bayne Stanley

Bayne Stanley/The Canadian Press

Betting on an economic recovery may be difficult for investors, given the rising number of COVID-19 cases in North America and new lockdowns in Europe.

However, major clinical trials are well under way globally to develop a safe coronavirus vaccine and results could emerge in the coming weeks or months. Gilead Sciences Inc.’s (GILD-Q) Veklury (remdesivir) drug was the first COVID-19 treatment to get approval recently by the U.S. Food and Drug Administration (FDA).

There’s also room for optimism as China’s economy gains strength: it grew 4.9 per cent in the third quarter versus a year ago. And given the forward-looking nature of the stock market, equities can still rally – as some have done since the March lows – amid economic gloom.

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We asked three exchange-traded funds (ETFs) experts for their top picks to play a post-pandemic recovery.

Daniel Straus, director of ETFs and financial products research, National Bank Financial Inc.

The pick: iShares ESG Advanced MSCI Canada ETF (XCSR-T)

Estimated management expense ratio (MER): 0.17 per cent

This Canadian equity ETF can be an attractive way to play an economic recovery, particularly for investors who value stocks that meet certain environmental, social and governance (ESG) criteria, Mr. Straus says. An ETF that overweights financials and sharply underweights energy could be beneficial, he adds. In a post-pandemic world, demand for fossil fuels may fall due to reduced air travel and commuting as more people continue to work from home. Launched in April, the ETF’s fee is reasonable, he says. Top holdings include Shopify Inc. (SHOP-T) and Royal Bank of Canada (RY-T). A risk is the fund’s focus on Canada, which is only 3 per cent of global equity markets, while the potential upside may already be reflected in some stocks due to the growing popularity of ESG investing.

The pick: BMO S&P U.S. Small-cap ETF (ZSML-T)

Estimated MER: 0.22 per cent

This ETF, which tracks U.S. small-company stocks, offers better upside potential in an economic recovery versus the S&P 500 that has rallied largely on the back of heavyweight technology names, Mr. Straus says. “The strength of the recovery in small-cap stocks has lagged large caps since the spring lows so (small caps) probably have more room to grow.” Small-cap stocks historically have also outperformed large caps early in a recovery, but “during moments of market drawdowns, they fall further too,” he notes. Launched in February, the ETF owns names, such as Momenta Pharmaceuticals Inc. (MNTA-Q), Simpson Manufacturing Co. (SSD-N) and Meritage Homes Corp. (MTHN-N). The ETF’s fee is “fairly reasonable” for investors who want exposure to U.S. small-cap stocks in a domestically listed fund, he says.

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David Kletz, vice-president and portfolio manager, Forstrong Global Asset Management Inc.

The pick: Industrial Select Sector SPDR ETF (XLI-A)

MER: 0.13 per cent

This ETF, which invests in the S&P 500′s industrial sector, is a better bet among cyclicals to ride an economic rebound, Mr. Kletz says. Some optimism over an economic recovery is already reflected in mega-cap, technology stocks (including Facebook Inc. [FB-Q], Inc. [AMZN-Q], Apple Inc. [AAPL-Q], Netflix Inc. [NFLX-Q] and Alphabet Inc. [GOOGL-Q]) and large-cap consumer discretionary names, he adds. Industrials best represent the real economy stocks, but they “haven’t kept pace, so we think there’s upside there.” The ETF’s holdings include Union Pacific Corp. (UPN-N), United Parcel Service Inc. (UPS-N) and Honeywell International Inc. (HON-N). This ETF, which has US$12.6-billion in assets under management, has a competitive fee – albeit a tad higher than Vanguard Industrials ETF’s (VIS-A) 0.10 per cent MER, he notes. Risks include delays in developing a vaccine for COVID-19 and widespread lockdowns.

The pick: iShares MSCI Sweden ETF (EWD-A)

MER: 0.55 per cent

This fund, which tracks equities listed in Sweden, is a “high-beta play on European growth,” Mr. Kletz says. With 37 per cent in industrials, the ETF should benefit from an economic recovery that was given a boost recently by the European Union’s US$860-billion stimulus package, he adds. “Sweden is deeply ingrained in the European supply chain that effectively runs through Germany, which is a manufacturing powerhouse,” he notes. Atlas Copco AB (ATLKY-OTC), Ericsson AB (ERIC-Q) and Volvo AB (VLVLY-OTC) are among the ETF’s holdings. Sweden, which has a low debt to gross domestic product ratio of less than 40 per cent, can support its economy, but a recovery delayed by more lockdowns is a risk, he adds. This ETF is not cheap but is the only way to get market exposure to Sweden in a North-American listing, he says.

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Alex Bryan, director of passive strategies research for North America, Morningstar Inc.

The pick: Invesco S&P SmallCap Consumer Discretionary ETF (PSCD-Q)

MER: 0.29 per cent

This ETF is a compelling way to play an economic recovery because it tracks U.S. small-cap consumer discretionary stocks that have struggled during the pandemic, Mr. Bryan says. “If we get a vaccine in the near term, or as things return to normal, consumer spending will likely increase.” Small-cap stocks, which have taken a bigger beating versus their larger peers, offer more upside potential because they tend to bounce back more in a rebounding economy, he adds. The ETF, which tracks this sector in the S&P SmallCap 600 Index, owns names such as Bed Bath & Beyond Inc. (BBBY-Q) and Shake Shack Inc. (SHAK-N). The ETF’s fee is reasonable, he says. Risks include delays in developing a vaccine or spending patterns not returning to pre-pandemic levels for bricks-and-mortar retailers as more people shop online.

The pick: U.S. Global Jets ETF (JETS-A)

MER: 0.60 per cent

This ETF, which gives exposure to the airline industry, will benefit from a return to air travel once a successful vaccine has been developed, Mr. Bryan says. “It’s hard to find a fund that would benefit as directly from the development of a vaccine as the airlines (which have been hit hard by COVID-19).” The ETF holds passenger carriers, such as Southwest Airlines Co. (LUV-N), Delta Air Lines Inc. (DAL-N) and Air Canada (AC-T), but also owns Cargojet Inc. (CJT-T), a Canadian cargo carrier. This ETF should be viewed as a tactical play because there’s still a lot of risk as most airlines are operating at a loss, he says. “Government help would certainly be beneficial. but it’s hard to say whether they will get it.” The fee for the ETF is on the high side, but it’s the only U.S.-listed airline ETF and is less risky than buying individual stocks, he adds.

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