With the holidays approaching, retail ETFs are once again in the spotlight. Last year was a banner year for the space, particularly those targeting online retail.
While the party looked set to continue at the beginning of this year, online retail ETFs have been trending down since February, while the broader retail sector has been trading sideways for months, raising questions about what to expect from it in the final quarter.
Will these consumer-driven ETFs recover heading into the holiday season? At this time, consumer data is painting a mixed picture. And given that consumer spending is a critical component of U.S. economic output, the answer to the question is of importance.
Consumer spending is sometimes referred to as the engine of our economy. Over two-thirds of GDP comprises personal consumption expenditures. These purchases have been making up a growing part of GDP since the late 1960s.
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Given its critical importance to the domestic economy, data surrounding consumer sentiment and activity is a highly watched economic indicator.
Yet currently, that consumer data is painting a mixed picture.
Last Friday, the University of Michigan consumer sentiment index showed a surprise decline. The index had decreased to 71.4 in October from September’s reading of 72.8. Economists had predicted the reading would rise to 73.0.
That said, the decline in consumer sentiment isn’t completely out of left field given the current economic backdrop. The good news is that COVID infections are leveling off in the United States. However, weekly cases remain elevated above levels seen during the late spring and summer months.
Inflation worries are also weighing on consumers’ minds. Inflation has increased to a 13-year high of 5.4% in September 2021. Yet with consumers feeling uncertain about the current economic environment, it does not yet seem to be slowing their spending.
Last Friday also saw the release of retail sales data from the Census Bureau. The latest reading showed an increase of 0.7% in the month of September, while estimates had been predicting a decline of 0.2%.
What is driving this divergence between consumer sentiment and consumer behavior? Another big story that has dominated the news could deserve the credit for consumers’ strong September spending.
Supply Bottleneck Driving Sales
The best-performing ETF of the year so far is the Breakwave Dry Bulk Shipping ETF (BDRY). This ETF provides exposure to freight futures, which have done exceedingly well given the supply chain bottleneck that has impacted the world this year.
Consumers who are worried about shipping times and inventories could be doing their holiday shopping early to ensure the gifts they purchase are received in time.
This is especially relevant since consumers are making more purchases online, a trend that was in place before but that the pandemic has only accelerated.
If this proves to be the case, this means that estimates for retail sales numbers later in the year could be disappointing since those purchases have potentially happened several months earlier than expected.
Given consumer activity’s importance to the domestic economy, it is no surprise that the Biden administration has its sights set on the supply chain issue. With many ports on the West Coast experiencing record backlogs, it is impacting the ability for new goods to be received until the current shipping containers can be unloaded.
Last Wednesday, Joe Biden announced a plan to ease these delays and resolve the backlog. He announced that the Port of Los Angeles will begin to operate around the clock while companies such as Walmart, UPS and FedEx expand their working hours to relieve the port’s backlog.
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The news helped bring BDRY’s performance to a decline of -10.0% for the week.
With many factors bogging down consumer sentiment ranging from the pandemic to price increases to shipping times, the future path for retail ETF performance is still unclear.
Should another variant emerge, this could cause more purchases to shift to online retailers. This would be good news for online retail ETFs such as the ProShares Online Retail ETF (ONLN) and the Amplify Online Retail ETF (IBUY).
And the resolution of the supply chain bottleneck could be bad news for BDRY, but good news for the SPDR S&P Retail ETF (XRT).
With so much weighing on consumers’ minds, the alleviation of supply chain bottlenecks could be the most important factor affecting retail ETF performance heading into the holiday season.