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Retail ETF Performance Diverges

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The reopening of the U.S. economy has yet to reach the entirety of the retail industry, with many businesses remain closed for the time being. But it turns out that consumers went back to consuming with authority last month, pushing the latest retail sales data well above market consensus.

U.S. retail sales jumped month-on-month a record 17.7% in May, according to the U.S. Department of Commerce, more than twice what market analysts had been expecting. The number also marks a complete reversal from downward-trending sales seen in the previous two months, due to the pandemic. Year-on-year, May sales are still down about 6%, but the improvement over April has sparked optimism that economic activity may soon resume full force.

Retail-focused ETFs sit center stage in this conversation, offering investors direct access to the retail story. But their performances have been vastly different because gains in the retail industry have not been uniform across the board.

E-Commerce Leading

E-commerce-focused ETFs have been the standout leaders in this segment. The biggest retail ETF, with $412 million in assets today, and the pioneer in online retail focus, the Amplify Online Retail ETF (IBUY), is up 33% year to date.

IBUY only invests in companies that generate at least 70% of their revenues from online sales, splitting the portfolio into a 75% U.S.-focused bucket, and a 25% foreign names allocation. Securities in each of these buckets are equal weighted.

That mix has worked well this year, even though some of the fund’s biggest names have been big losers in 2020. A look at the fund’s top holdings shows that Revolve Group (RVLV), holding a top portfolio allocation of 3.5%, is down 11% this year; Stitch Fix (SFIX) is down 7%; Lyft (LYFT) is down 12%. But also among top holdings is Chewy (CHWY), now up 60% in 2020; GrubHub (GRUB) is up 31%; Peloton Interactive (PTON) is up more than 73%.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

This divergence in performance among retail names has helped propel another e-commerce ETF even higher, thanks to its modified market-cap weighting that’s had some of the biggest winners driving portfolio returns.

The ProShares Online Retail ETF (ONLN) is up almost 39% so far this year.

ONLN has only $148 million in total assets, but its biggest allocation is Amazon (AMZN), which is up 41% so far this year. Amazon represents about 24% of the portfolio. Also among top holdings is Wayfair (W), which is now up 115% this year; Etsy (ETSY), which is up 90%; Alibaba (BABA), now up 5%; and GrubHub, up 31%.

ONLN owns global online retailers that only sell online or through mobile apps. The fund specifically excludes brick-and-mortar businesses, as well as online travel companies.

Brick- & Mortar’s Big Disparity

Outside the booming world of e-commerce, brick-and-mortar retail has offered a different ride.

One of the veterans in this retail segment, the $394 million SPDR S&P Retail ETF (XRT), has lagged its counterparts significantly in 2020.

In a year when there have been clear winners and losers in retail, XRT has faced two main challenges. First, even though XRT isn’t only a brick-and-mortar portfolio, as it too owns big online retailers, some of the fund’s stocks have been poor performers this year.

Secondly, the fund’s equal-weighted methodology has not only diluted gains of some of the segment’s leaders, it’s allowed the laggards to be drivers of portfolio returns—or losses—as the winners. Accentuating that is the fact that XRT owns retail stocks found in the S&P Total Market Index—a very broad benchmark—meaning the fund owns a lot of small- and micro-cap names as a result.

For example, Amazon, which is up 41% in so far 2020, has only about a 2% weighting in XRT’s portfolio. The same goes for Wayfair, now up 115% this year; Stamps.com (STMP), up 119%; and Etsy is up 90%—each of these stocks represents less than 3% of the overall mix.

The performance of these stocks packs quite a punch, but the allocation to these names isn’t big enough to drive the entire basket of 90-or-so-holdings dramatically higher.

By comparison, the concentrated 25-holding market-cap-weighted VanEck Vectors Retail ETF (RTH) has 24% of its portfolio tied to Amazon—that’s 12x the allocation XRT has to this stock.

The fund’s biggest holding aren’t big winners this year, but neither are they trading in the negative. Home Depot (HD), at 10% of the mix, is up more than 15% this year. Lowe’s (LW), at 5%, is up more than 10%.

Hedged Bet Still The Winner

In the end, it’s neither a bet on online retail nor a bet on brick-and-mortar that has worked best to capture this challenged segment of the economy.

Instead, it’s a hedged portfolio that’s long online stocks and short brick-and-mortar stocks that’s leading performance. The ProShares Long Online/Short Stores ETF (CLIX) is up 43% year to date, outpacing online-only ETFs by as much as 10 percentage points.

The long/short portfolio invests in (goes long) online retailers and e-commerce giants such as Amazon, Alibaba and Wayfair—the year’s biggest winners; and sells (shorts) companies that have at least 75% of their retail revenue come from in-store sales, like Macy’s (M), which is down 52% this year; Ross (ROST), down 17%; and Foot Locker (FL), down 21%. 

Due Diligence Made Simple

Clearly, there’s a lot going on in the retail industry, and each ETF goes about capturing that story in a different way, leading to massive disparity in results.

Luckily, navigating this space is easy with the help of a few simple free-to-you tools. You can access a comprehensive list of all 10 different retail ETFs in the market today in our Retail ETF Channel, with each ETF ticker linking back to its fund fact sheets full of details about the strategies (etf.com/ticker).

You can then compare these funds side-by-side in our free ETF Comparison Tool. Simply input two tickers at a time and compare and contrast portfolios.

And finally, you can find out which retail ETF owns any specific stock you are looking for in our ETF Stock Finder Tool. Here, you can plug in the ticker or the company name you are interested in—say, AMZN, or Amazon—and find out which ETFs hold the most allocation that particular stock.

As always, feel free to reach out if we can help you find the information you seek.

Contact Cinthia Murphy at [email protected]

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