E-Commerce Boom Fuels These ETFs

May 17, 2016

Last week was painful for retail stocks. Earnings misses from the likes of Macy's, Nordstrom and Gap sent those respective stocks plunging, fueling broader fears about the health of the U.S. consumer and the economy.

With that backdrop, investors were bracing for the worst on Friday, when the government was due to release the monthly retail sales report. Yet, lo and behold, the Commerce Department reported that retail sales actually surged April.

In fact, the 1.3% increase in April was the fastest pace of growth in more than a year.

With these mixed messages, it's easy for an investor to get confused about the outlook for retailers. Are things rosy or are things gloomy?

Retail Sales Growth (month-over-month)

Department Stores Struggle, Overall Sales Solid

The answer to that question largely depends on what type of retailers we're talking about. There's no question that department stores―like the aforementioned Macy's and Nordstrom―are doing poorly.

According to the latest Commerce Department figures, sales in that category were down 1.7% from a year ago in April.

However, aside from department stores, electronic stores and gasoline stations, retail sales are doing just fine. Overall sales were up by 2.7% year-over-year in April, with one category in particular leading the charge―online.

Online sales were up a whopping 10.2% from a year ago in April.

Online Sales Steadily Growing

Of course, this trend is nothing new. Consumers have been gravitating toward doing more of their shopping online for years now.

According to the Commerce Department, total e-commerce sales in 2015 were $341.7 billion, which represents 7.3% of total sales. That's up from $91 billion, or 2.5% of total sales, in 2005.

Most analysts believe that e-commerce sales will continue to grow by double-digit percentages annually, gaining market share at the expense of brick-and-mortar sales.

Amazon Dominates E-Commerce

That said, when it comes to online retailers, one company dominates. Nearly 26% of all Web sales are done at Amazon.com, according to analysts at Macquarie Research. Moreover, more than half of all growth in Web sales are going to the company.

With an outlook like that, it's no wonder that Amazon surpassed Walmart as the world's largest retailer by market value last year. Since then, the gap has only grown larger; Amazon currently has a market cap of $333 billion, compared with $206 billion for Walmart.

RTH Beats XRT

For investors, shares of Amazon have been the closest thing to a home run. That applies to ETF investors as well.

The retail exchange-traded fund with the highest weighting in the e-commerce giant has outperformed. The $138 million VanEck Vectors Retail ETF (RTH | A-79) has the highest weighting in Amazon of all ETFs, retail or otherwise, at 13.7%. RTH holds a market-cap-weighted basket of the 25 largest retailers in the U.S.

That's given it a leg up on the $504 million SPDR S&P Retail ETF (XRT | A-46), which has only a 1.2% weighting in Amazon, because it equal-weights all stocks in the U.S. retail industry.

In the past year, RTH is up 0.5%, compared with a 16% loss for XRT. Since RTH's inception in December 2011, the fund is up 114.4%, far outpacing the 64.8% return for XRT.

RTH, XRT Returns Since December 2011


IBUY: New ETF Focused On E-Commerce

Another fund worth mentioning is the brand-new Amplify Online Retail ETF (IBUY), which launched a month ago. IBUY specifically targets the e-commerce space by holding stock in firms that generate at least 70% of their revenue from online sales.

About three-quarters of the ETF's portfolio is in U.S. companies, while the rest is in international names.

IBUY uses an equal-weighting scheme that currently gives each international stock about a 1.3% weighting and each U.S. stock about a 3.2% weighting―including Amazon. Compared with the aforementioned RTH, IBUY's weighting in Amazon looks small, but it has the benefit of being much more diversified.

Since its inception on April 20, IBUY is down 4%, slightly worse than the 2.5% loss in RTH, but much better than the 9.2% decline in XRT.


Other Amazon-Heavy ETFs

RTH isn't the only ETF with a heavy weighting in Amazon, but it's the only retail-specific fund with that characteristic.

Two Internet ETFs, the First Trust Dow Jones Internet Index Fund (FDN | A-58) and the PowerShares Nasdaq Internet Portfolio ETF (PNQI | B-61), also have heavy weightings in the stock—10.3% and 8.2%, respectively.

Additionally, broad sector ETFs, such as the Consumer Discretionary Select Sector SPDR Fund (XLY | A-90), also have heavy weightings in the stock (9.9% for XLY).

Performancewise, all three of these ETFs outperformed the broader market during the past several years.

YTD Returns For FDN, PNQI, XLY

Of course, past performance is no guarantee of future results. But if one believes that online sales will become an increasingly large portion of overall retail sales, it makes sense to have exposure to the world's largest online retailer.

Sumit Roy can be reached at [email protected].

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