Harvest Portfolios Group

A High Income Travel ETF

April 12, 2023
A High Income Travel ETF

By Harvest ETFs

Harvest ETFs has just launched the Harvest Travel & Leisure Income ETF (TRVI:TSX). The ETF’s thesis is straightforward: combine a portfolio of 30 of the largest diversified Travel & Leisure companies listed in North America with an active and flexible covered call option strategy to deliver growth prospects and high income for investors.

TRVI tracks the same Solactive index as the Harvest Travel & Leisure Index ETF (TRVL:TSX), which was launched in 2021 as the first Canadian ETF designed to capture the whole multi-sector travel & leisure industry.

“We have seen clear growth tailwinds in the travel & leisure industry for years now,” said Michael Kovacs, President and CEO of Harvest ETFs. “Baby boomers are retiring in droves and entering their prime travelling years. Millennials are now in their peak earning years, and that generation has already shown a preference for experiential spending. Add to that travel companies’ innovations, making new exciting experiences available to more people, and you see a very positive case for travel. That’s why we launched TRVL in 2021. Now we’re launching TRVI to give investors access to that positivity, with the high income Harvest ETFs is known for.”

A diversified Travel Portfolio

Kovacs explained that TRVI’s index portfolio was specifically designed to capture the broadest cross section of the travel & leisure industry as possible. It holds large-cap companies in five distinct sectors: airlines, cruise lines, hotels & resorts, casinos, and online booking services. Where historically Canadian investors seeking exposure to travel tailwinds might buy some airline stocks and call it a day, TRVI offers exposure to every stage of a hypothetical trip.

Let’s say, for example, a family is taking a cruise around the Caribbean. Where an airline stock might capture revenue from their flights, TRVI is exposed to revenues from their flights, their cruise, perhaps a hotel stay on the night before their cruise leaves, and potentially some of the entertainment they may take in as part of their holiday.

That broad-based exposure holds for an older couple staying at Airbnbs on a tour of great European cities, or a bachelor party to Las Vegas, or even a business trip. People travel so many different ways, and TRVI is exposed to as many forms of travel as possible.

To Kovacs, capturing that variety of travel experiences means capturing the significant drivers for travel. The demographic trends of retiring boomers and high earning millennials set the backdrop, but other key trends are supporting this sector. Globally, disposable income levels are rising, prompting regional travel growth dynamics already being captured by travel & leisure companies with a global presence.

Business travelers are a key driver as well. Deloitte’s 2023 travel industry outlook found that the rapid resumption of high-margin business travel post pandemic is skewing heavily towards conferences and tradeshows. In addition to the high margins business travelers generate for airlines, a greater emphasis on conferences can be a significant tailwind for the hotel & resort sector.

TRVI then adds to its diversified exposure and diversified drivers with high monthly income from covered call options.

Combining Travel with Income

“We saw the addition of an active covered call option strategy as a natural next step for our Travel & Leisure index,” said Kovacs. “The sector fits in well with our vision for equity income ETFs: it’s full of large-cap leading companies, it has significant growth prospects, and we can monetize any short-term volatility in the industry.”

Harvest ETFs is a Canadian leader in active covered call option strategies, earning high yields for its equity income ETFs by ‘writing’ call options on a portion of their ETFs holdings – within a maximum limit of 33%. Writing call options trades off some market upside in exchange for premiums, which are passed on to unitholders as a monthly cash distribution.

By using an active strategy, Kovacs explained, TRVI can meet its monthly distribution requirements while maximizing exposure to potential upside in the space. The 33% write limit means 67% of the portfolio is always exposed to possible upside. By empowering TRVI’s portfolio managers to be active, however, the ETF can benefit when option premiums rise—generally during periods of high volatility. Portfolio managers can either write at lower levels to expose more of the portfolio to potential upside, or write at the same levels to earn higher income premiums and ensure monthly cashflow stays consistent.

The travel & leisure industry has experienced higher than average volatility, Kovacs noted, as its companies are usually considered consumer discretionary. Using a covered call option strategy allows investors to monetize any volatility in the travel & leisure space, while remaining exposed to the long-term growth potential in travel.

TRVI offers what many Canadian investors are seeking right now. It delivers high monthly income, it captures a broad-based portfolio of large-cap companies with true diversification. Perhaps most importantly, though, it invests in something that nearly everybody wants to do more often: travel.


Travel & Leisure
Income ETF

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