Despite supply-chain tensions and inflationary pressures, the holiday season should see another retail sales record. The National Retail Federation forecasts that overall retail sales in November and December will increase from 8.5% to 10.5% over 2020, significantly higher than the 4.4% average growth over the past five years. This could give a timely boost to retail stocks, especially e-commerce names that have slipped this year as the economy reopens.
Traditional retail stocks jumped as COVID-19 vaccines drove more consumers back into stores. The Solactive-ProShares Bricks & Mortar Retail Store Index, which tracks 40 retail companies primarily dependent on in-store sales, gained 39% so far, while the S&P 500 index returned 24%.
Meanwhile, the e-commerce name of 2020’s big profit post “everything goes online” is fueled by the pandemic frenzy. Many stocks became too expensive to sustain growth. The ProShares Online Retail Index, which tracks 40 major e-commerce stocks from around the world, fell 30% from its February peak and is down 12% so far.
Nevertheless, in the long term, the growth of e-commerce is not going to stop. According to the US Census Bureau, online shopping accounted for 13% of total retail sales in the second quarter of 2021. Market research company eMarketer estimates that the penetration rate could reach 24% by 2025.
Online retailers have historically traded at higher multiples than their brick-and-mortar peers, but the premium has fallen recently. The group now looks more attractive than it was a year ago, creating a buying opportunity. Strong sales during the holiday season can be a much-needed catalyst for stocks, which investors can access through some exchange-traded funds.
For example, the $784 million ProShares Online Retail ETF (ticker: ONLN) tracks the ProShares Online Retail Index and weighs its holdings by market capitalization, although a stock cannot make up more than 25% of a portfolio when it is rebalanced. does. Currently, its largest holding is Amazon.com (AMZN) with a 26% weightage. Chinese e-commerce giant Alibaba Group Holding (BABA), despite losing half of its market value over the past year, has the second largest allocation of funds at 10%. The fund is highly concentrated, so investors who already own shares of Amazon should watch for overlap.
The $825 million Amplify Online Retail ETF (IBUY) reaches further down the market-cap ladder and holds approximately 80 e-commerce firms. The fund weights its holdings equally, which means it leans more toward small-cap names than the Amazon-dominated ProShares ETF. Currently, its top holdings include Newegg Commerce (NEGG), a small online retailer with a focus on computer hardware and consumer electronics, and Etsy (ETSY), a seller of handmade goods and craft supplies. The fund is more diversified and can spread risk among multiple holdings.
The $195 million Global X E-commerce ETF (EBIZ) is somewhere in between. It weights holdings by market cap, but with a restrictive cap: no stock can make up more than 4% of the portfolio when it rebalances. Current top holdings include ETC and Williams-Sonoma (WSM), which sells kitchenware and home goods. The Global X ETF stands out for its large international exposure: 44% of its assets are invested in non-U.S. stocks, compared to 25% of the other two ETFs. The Global X Fund is the smallest of the three, but has been less volatile, meaning smaller gains but fewer losses.
The three ETFs are down 14%, 11% and 4% year over year, respectively, and now trade at similar multiples of 27 to 29 times forward earnings. With the recent retreat of the Russell 2000 Index, the small-cap-focused Amplify ETF may be best positioned to see a strong rebound. NS
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