It's been more than a year since the coronavirus unfortunately became a part of the everyday lexicon in the U.S. As advisors well know, the pandemic delivered an array of investment implications.
At the sector level, many of those implications – some positive, some negative – are found in consumer discretionary. Long story short, the sector was supported last year by the likes of Amazon (NASDAQ:AMZN) and Home Depot (NYSE:HD) – stocks benefiting from the stay-at-home trade. Cheer cap-weighted strategies because the S&P 500 Consumer Discretionary Index gained 29.6% last year thanks in large to part to the aforementioned names.
Essentially all corners of the sector dependent on travel and going – casino and cruise operators, hoteliers and more – were slammed during the initial lockdown phase. Fast-forward to the first quarter of 2021 and vaccines are rolling out and many Americans are flush with cash thanks to Uncle Sam. Consumer-facing and travel-dependent segments are still a long way from looking like it's 2019 again, but casinos are adding capacity and Disneyland in California – home to some of the harshest pandemic shutdowns – is reopening, albeit at limited capacity, next month.
That says the reopening trade is on, meaning advisors may be fielding more client inquiries about gaining exposure to this concept.
Eschew Reopening Stock Picking
Allocating to the reopening trade requires a couple of acknowledgments. First, data confirm stock picking remains difficult at best – even for professionals. Second, stock picking in the name of the reopening economy is exceedingly tricky because price action isn't linear across the various trade ideas. As just two examples, casino equities and cruise operators are affected by different headwinds.
Advisors can ease this burden with the Invesco Dynamic Leisure & Entertainment ETF (PEJ). The fund tracks the Dynamic Leisure & Entertainment Intellidex Index, which is built for the reopening trade because so many of its components are direct, consumer-facing companies.
“Screening companies through bottom-up revenue data, the index universe ranges from hospitality to entertainment programming, investing in companies such as hotels, restaurants, cruises and airlines, media companies, theme parks, and movie theaters,” says Rene Reyna, Invesco head of thematic and specialty product strategy and indexes. “While media has offered some safe havens during the pandemic, many conglomerates like Disney also stand to benefit from the full re-opening of parks and retail stores. In fact, through segment revenue analysis, we found that PEJ was 61% exposed to in-person activities as of its last rebalance.”
Though it's not an actively managed fund, PEJ is shifting with the times. It's chain restaurant exposure is scant and it currently features no exposure to cruise lines. That's a plus because that industry faces one of the murkiest, longest roads back to pre-pandemic capacity levels. In other words, PEJ offers a level flexibility not seen in traditional beta ETFs.
“Take the airline industry, for example, which has been in the fund 83% of the time over the last five years,” adds Reyna. “During the pandemic, however, the fund made a noticeable shift away from airlines and hotels and into entertainment and media. Because of the diligent rebalance process, different segments can come to the forefront as fundamentals wax and wane.”
PEJ Pertinent Reopening Idea
The current composition of PEJ taps into a vital element of the reopening trade. For as much as many Americans want to travel and take “real” vacations, be it domestically or internationally, traditional forms of extended tourism may be limited until vaccination numbers increase.
At the moment, the Invesco ETF is more levered to localized concepts such as movie theaters, theme parks and staycation concepts with a smattering of regional casino exposure sprinkled in.
“Consumers will likely be eager to revisit local establishments before they can plan longer trips from home that involve planes, hotels, and cruise ships,” said Reyna.
PEJ's methodology helps advisors effectively position within the reopening without having to make potentially risky bets on individual names.
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