The pumpkin spice scent gives way to peppermint. Mariah Carey has a spike in her residual checks. Commercials for Chia Pets are back on the air.
The holiday shopping frenzy has officially begun — and that could be good news for a host of investments, including online retail exchange-traded funds (ETFs).
This year promises to be a little different from the Black Fridays of yesteryear. The way people shop has fundamentally changed for years – from physical to digital – but the COVID-19 pandemic has been rocket fuel for e-commerce.
We’ve already had a taste of it during the 2020 holiday season, and while Americans won’t face the same COVID restrictions as last year, e-commerce is still expected to play a huge role in driving the sales push. retail at the end of 2021.
A Deloitte survey shows that Americans plan to spend 62% of their vacation budget online, compared to 33% in-store (with the remaining 5% spent through direct mail, catalog and other sources). Although this figure is slightly lower than last year’s record of 64%, it is still a clear majority and the second highest figure on record.
This is great news for e-commerce stock owners. And even better for potential new buyers: many stocks in the sector are at relatively attractive valuations.
“While Internet and Direct Marketing Retailers historically traded at a higher P/E multiple than the broader Consumer Discretionary sector, the premium has recently been below the historical average, creating a potential buying opportunity using ETFs,” says Todd Rosenbluth, head of ETFs & Mutual Funds Research at independent research firm CFRA.
Here, we take a look at three online retail ETFs worth taking a closer look at, especially as the holiday season approaches. Each represents a different way of slicing and slicing the industry.
Data is as of November 15.
Amplify Online Retail ETF
- Assets under management: $905.5 million
- Expenses: 0.65%, or $65 per year for every $10,000 invested
the Amplify Online Retail ETF (IBUY, $112.99) is the oldest and largest pure-play ETF covering the world of e-commerce. It has a basket of businesses that derive “significant revenue from online and virtual retail sales.” In this case, “significant” means that to be included in IBUY’s underlying index, a business must generate 70% or more of its revenue from online sources.
IBUY must hold at least 75% of its assets in companies based in the United States, and this is currently the case, with the remaining 25% invested in stocks from Germany (5.5%), China (4 .6%) and the United Kingdom (3.9%). among others.
Holdings are weighted equally within their geographic pools and the index is rebalanced semi-annually. Thus, $1.8 trillion Amazon.com (AMZN) – which has a massive presence in market-cap-weighted retail ETFs – currently represents just 1.7% of IBUY’s assets, well outside of the top 10. -caps BigCommerce Holdings (BIGC) and The RealReal (REAL), so many opportunities to have an impact on returns.
This is great for investors, as it gives them greater exposure to potentially faster growing e-commerce businesses. It’s much harder to move a big ship, like Amazon and its more than $386 billion in annual revenue, than it is to move the needle on smaller online retail businesses.
This focus on big and small players seems to be the key to its success. IBUY has generated a total return (price plus dividends) of 350% since its inception in April 2016, compared to 173% for the consumer discretionary sector and 148% for the S&P 500.
Perhaps the only strike against Amplify’s fund is its cost. A few years ago we might not have looked at a 0.65% fee, but given that it’s now common to see thematic ETFs charging 0.40% or less, IBUY seems a little expensive. However, given its returns, as well as a five-star rating from CFRA’s prospective analysis methods, the price is justifiable.
ProShares Online Retail ETF
- Assets under management: $890.8 million
- Expenses: 0.58%
Of course there’s something to be said for owning many from Amazon.com. The company’s massive size and reach has allowed Amazon to continue to grow by simply branching out into new categories and often dominating through its resources.
If you agree, you’ll probably appreciate CFRA’s five stars ProShares Online Retail ETF (ONLN, $71.32), too.
ONLN focuses on global retailers who “sell primarily online or through other non-store channels”, which is similar to IBUY’s goal. However, while IBUY is equally weighted, ONLN has a modified approach to market cap-weighted construction. In other words, the biggest companies – names like Amazon, Alibaba (BABA) and eBay (EBAY), among others – get the biggest weightings.
“The CFRA has STARS qualitative analytics coverage of 11 global companies in the Internet and direct-to-retail marketing subsector, spread across four buys, six reservations and one strong sell,” Rosenbluth says. “AMZN and EBAY, which are the two companies recommended to buy domiciled in the United States, are ONLN’s first and third largest positions, together accounting for 29% of assets.”
That’s not necessarily a bad thing. For example, CFRA expects Amazon to continue to grow its e-commerce market share and AWS cloud business, and believes that while some may have delisted EBAY, “we see room for several large third-party seller platforms and view EBAY’s strong position in used and unique goods, as well as its iconic brand, as the basis for a potentially greater, longer-lasting return to growth.”
It should be noted, however, that the ProShares Online Retail ETF’s more conservative large-cap focus may weigh on its returns. ONLN’s three-year average annual return is 30.2%, 6.4 percentage points lower than Amplify’s IBUY. The fees are also a bit expensive, although at 0.58% per annum they are cheaper than IBUY.
VanEck Retail ETF (RTH)
- Assets under management: $245.8 million
- Expenses: 0.35%
Our third option is not what you would typically think of as an online retail ETF.
the VanEck Retail ETFs (RTH, $193.18) is a fund full of brick-and-mortar dinosaurs. Just look at the major holdings: Walmart (WMT), Target (TGT), Home Depot (HD) and Best Buy (BBY) are a who’s who of big box retail.
Here’s why RTH is nonetheless a good play on online spending growth:
For one, the aforementioned companies — and most of RTH’s other holdings, for that matter — survived the Amazonpocalypse by building impressive omnichannel operations (both physical and digital) that have evolved further during the pandemic. Walmart, for example, is still a springboard for digital growth, with online sales jumping 79% year-over-year in the fiscal year ended Jan. 31, 2021.
Also, RTH holds a few games mostly online. The most notable of these is – surprise, surprise – Amazon.com, which accounts for nearly 19% of assets. China’s JD.com (JD) and US online home goods store Wayfair (W) combine for an additional 5%.
Due to their mandates, the major online retail ETFs do not include many traditional brick-and-mortar chains that have figured out how to navigate the new shopping environment. It’s a real shame, because they leave several attractive participations on the table.
By using RTH in conjunction with an ONLN or IBUY, investors can own a much larger portion of the entire online retail pie, from newcomers to established digital names to omnichannel success stories.
And at 0.35%, there is no cost issue.