I generally steer clear of investing based on trends, largely due to the herding effect that often accompanies them. This phenomenon occurs when investors flock to a particular asset or sector because they perceive others are doing the same, driving up prices.
By the time a trend reaches mainstream news, it’s often too late to capitalize on it effectively. At this stage, entering the market could mean you’re providing an exit for earlier investors—essentially, you become their liquidity.
However, if you’re set on investing in trends through exchange-traded funds (ETFs), it’s wise to focus on those underpinned by long-term, structural tailwinds rather than fleeting fads.
Instead, look for trends supported by geopolitical developments, regulatory changes, and government priorities that promise sustained growth over time rather than short-lived spikes in interest and value. Here are my picks.
North American infrastructure
If you want to capitalize on the growing trends of increased urbanization, rising energy demands, and the re-shoring of manufacturing, focusing on infrastructure is a strategic move.
Infrastructure encompasses a wide array of sectors and companies, including gas, electric, and water utilities, cell tower operators, heavy machinery manufacturers, engineering consultancies, pipelines, and railways.
These industries are integral to supporting an expanding urban environment and the shifting dynamics of production and energy supply.
While many of these sectors are capital-intensive and often carry significant debt levels, they typically compensate for these factors through consistent free cash flow generation.
This robust cash flow allows many companies within these industries to offer high dividend yields, making them attractive to income-focused investors.
For those interested in investing in this critical area, my preferred ETF is BMO Global Infrastructure Index ETF (TSX:ZGI). This ETF charges a moderate expense ratio of 0.61% and offers a 3.27% annualized distribution yield.
U.S. aerospace and defence
If you have ethical objections to investing in the defence sector, you may want to skip this section. For those continuing, it’s clear that defence spending remains a critical element in the sovereignty and security of nations.
Recent conflicts, such as the ongoing situation in Ukraine and other geopolitical tensions, highlight the ongoing and increasing demand for military and defence capabilities.
The U.S., for example, has been actively involved in supporting Ukraine with billions in aid, which includes direct defence equipment and services.
For investors looking to align with this sector, iShares U.S. Aerospace & Defense Index ETF (TSX:XAD) provides a targeted way to invest. This ETF is the only Canadian-listed option available for this purpose and includes 34 top U.S. defence contractors.
It offers exposure to aerospace manufacturers, defence contractors, cybersecurity consulting firms, and private intelligence companies, all for an expense ratio of 0.44%.
