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Rene Reyna, Invesco

Targeting leisure and entertainment in the re-opening economy


The Leisure and Entertainment sector could offer investors a unique way to play the economic re-opening writes Rene Reyna (pictured), Head of Thematic ETFs and Specialty Products, Invesco. 

Since the global pandemic took hold in 2020, economies around the world have been on a rollercoaster ride. Even with unprecedented monetary and fiscal stimulus, the recovery has been extremely uneven. While some companies thrived in the ‘stay home’ economy, many more have struggled with quarantine orders and nervous customers. Now, as the US moves toward vaccinations and begins the process of re-opening, investors are looking for creative ways to invest in these companies that have long awaited the resumption of the “go out” economy. Below, I explain why taking a focused, industry-level approach in the Leisure and Entertainment space could help investors leverage this unique opportunity. 

Early in the pandemic, there was a concerted effort to determine the shape that the eventual economic recovery would take. Would we see a V-shape with a sharp upswing after the lockdowns of spring 2020? Would we see a long-tailed U-shape with slow, stalling growth? What we ended up seeing was far more divergent — what many now describe as the ‘K-shaped recovery’ — with e-commerce companies that became staples for pandemic shopping regaining their footing quickly while laggards have struggled for longer. 

Nowhere has this been clearer than in the ‘go out’ economy. Restaurants, stores, entertainment facilities — all have struggled with a lack of customers and far higher costs of safely doing business. Job losses have been concentrated among lower wage workers, and policymakers are deeply concerned about the scarring effects this divergence will have on the economy. 

However, there now appears to be light at the end of the tunnel. At the time of writing, the US is now more than 10 per cent vaccinated while acquired immunity through infections is speculated to put US immunity far higher. Even before herd immunity is reached, cases have recently fallen as much as 60 per cent, potentially pulling at least some of the re-opening into spring. This has driven investors to speculate about how to invest as the economy rotates back into something far more familiar. Through unprecedented economic stimulus, consumers also have large reserves of cash on hand, and they will likely be eager to spend it when they can finally venture safely out of their homes. 

While many investors are focusing on traditional sources of value— financials, energy stocks, and more — I propose looking at Leisure and Entertainment as a potential source of value in these unprecedented times. The Invesco Dynamic Leisure & Entertainment ETF (PEJ) may provide a potential solution for investors interested in this segment of the economy. 

When investors think about the opportunity presented by the full reemergence of the American consumer, they naturally think of traditional sector investing such as the Consumer Discretionary sector. However, given the divergence in the economy, more nuance may be required. For example, the SPDR Consumer Discretionary ETF (XLY) held 22.48 per cent of the portfolio in Amazon at the end of January. While Amazon is certainly consumer-oriented, it has been one of the largest beneficiaries of the ‘stay home’ economy. 

By taking a more nuanced industry approach, investors could potentially target their desired exposure. In the case of PEJ, the fund tracks the Dynamic Leisure & Entertainment Intellidex index, which focuses squarely on the externally facing consumer. 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. 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 per cent exposed to in-person activities as of its last rebalance. 

The Intellidex index series follows a smart beta strategy, focused on fundamentals within each respective industry. By tracking 47 distinct indicators, the index targets five broader factors —price momentum, earnings momentum, quality, management action, and value. Perhaps more importantly, this quantitative model is reapplied quarterly, which may provide the flexibility investors need in a quickly developing economic environment. 

Even within a focused industry such as Leisure & Entertainment, there is a wide array of business lines whose relative weights can shift dramatically over time. Take the airline industry, for example, which has been in the fund 83 per cent of the time over the last five years. 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. 

 More importantly, this flexibility could help investors stay nimble as new phases of re-opening occur, as it is entirely possible that we will see a staged recovery. Beginning with their favourite restaurants and bars, consumers will likely be eager to revisit local establishments before they can plan longer trips from home that involve planes, hotels, and cruise ships. By using a smart beta process, investors can rely on the fundamentals to eventually rotate into these areas instead of attempting to time bets within the industry. 


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