I’m a firm believer in the “core and explore” investment strategy, which advocates for building the foundation of your portfolio with broadly diversified, low-cost index exchange-traded funds (ETFs), while reserving a portion for higher-risk stock picks.
This approach combines the stability and broad market exposure of index investing with the excitement and potential high rewards of stock picking.
A compelling way to utilize the “explore” portion of your portfolio is through thematic investing. This involves betting on long-term trends in industries that are either emerging or poised for a rebound.
Whether it’s a sector that’s innovating rapidly or one that’s set for a resurgence, thematic investing allows you to capitalize on these trends.
The versatility of ETFs makes them an ideal vehicle for thematic investing. They offer the opportunity to invest in a concentrated theme or industry without the need to pick individual stocks.
With the vast array of ETFs available in the market today, there’s likely an ETF that aligns with almost any investment theme you believe in.
As we navigate through 2024, there are two top trends that I’m particularly excited about — here’s what they are and the ETFs you can use to invest in them.
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Canadian REIT resurgence
Real estate investment trusts (REITs) in Canada have certainly faced their share of challenges throughout 2022 and 2023, largely due to rising interest rates. When interest rates increase, it tends to hurt REITs in a couple of key ways.
Firstly, higher rates can increase their borrowing costs, as many REITs rely on debt financing. Secondly, as interest rates rise, investors often shift towards fixed-income assets like bonds, which become more attractive due to their higher yields, leading to a selloff in REITs.
However, as we move into 2024, there appears to be a light at the end of the tunnel for Canadian REITs. With the Bank of Canada pausing rate hikes for three consecutive sessions and even contemplating rate cuts, there’s a potential for upside in this sector.
Many Canadian REITs, particularly office REITs, haven’t fully recovered since the COVID-19 pandemic. This presents an opportunity for investors to capitalize on these lower valuations.
For those looking to invest in this trend, iShares S&P/TSX Capped REIT Index ETF (TSX: XRE) is my preferred choice to capture the Canadian REIT sector.
One of the attractive features of this ETF is its monthly distributions, which can be particularly appealing for income-seeking investors. As of January 16, XRE is projecting an annualized distribution yield of 5.36%.
Defence stocks in case of war
The heightened geopolitical tensions worldwide, notably following the February 2022 Russian invasion of Ukraine, and subsequent events like the October attacks on Israel by Hamas, the Houthi attacks on shipments in the Red Sea, and hostilities involving Iran, Pakistan, and Iraq, have brought defence stocks into focus.
In such times, U.S. aerospace and defence contractors often see increased interest from investors. Given this backdrop, the only ETF available to Canadians in Canadian dollars that focuses on this industry is the new iShares U.S. Aerospace & Defense Index ETF (TSX: XAD).
This ETF tracks the Dow Jones U.S. Select Aerospace & Defense Index, which includes a concentrated portfolio of 35 companies involved in manufacturing planes, missiles, tanks, ships, and other critical defence and aerospace equipment.
