ProShares: E-Commerce: Primed For Continued Growth?

Amazon and beyond: Explore the (still) early opportunity of e-commerce and a strategy to pinpoint select online retailers.

Head of Investment Strategy
Reviewed by: Simeon Hyman
Edited by: Simeon Hyman

[This ETF Industry Perspective is sponsored by ProShares.]

The strong and incessant growth of e-commerce is likely to continue, even as the economy reopens,1 and with it, the investment opportunity. Among the drivers:

  1. E-commerce penetration is lower—perhaps far lower—than you think.
  2. The distinction between “born” online and legacy bricks-and-mortar stores still matters.
  3. There’s more to e-commerce than just Amazon, and many of these companies are showing strength.

1 Global retail e-commerce sales are expected to climb to over $6 trillion by 2024, up from under $5 trillion in 2020, according to eMarketer forecasts as of December 2020.

Boxes Have Been Piling Up, But Is It Just the Beginning?

Sources: Adjusted numbers from U.S. Department of Commerce, 2009-Q1 2021. *2024 estimate from eMarketer, October 2020.

The above chart is not a mistake. At the height of the lockdown, e-commerce penetration rose to an underwhelming 16% in the United States, a number likely much, much lower than most would guess. As of Q1 2021, e-commerce as a portion of total retail had retreated slightly, yet was still notably higher than pre-pandemic levels, even as the economy started to reopen.

If we simply returned to something like the pre-pandemic growth rate, e-commerce penetration would trend around 20% in five years. However, many forecasts are predicting the acceleration of the trendline to continue post-pandemic. In its October 2020 report, eMarketer expected e-commerce penetration to get close to 20% in just three years’ time. Keep in mind that a 20% penetration would achieve roughly a 50% increase in total e-commerce sales. There’s still lots of growth to come.

Walmart May Be in Second Place, But at What Cost?

Source: Bloomberg, data as of 3/31/2021. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization.

The pandemic continued a key trend for Walmart, which is now the number two online retailer—and often cited by those who claim there’s no longer a meaningful distinction between bricks-and-mortar and online retailers. Despite Walmart’s online sales growth and a Q1 2021 stimulus-driven rebound, Walmart’s EBITDA margin has declined, while Amazon’s has dramatically improved.

Other bricks-and-mortar retailers like Target and Macy’s have fared similarly to Walmart. Traditional players can be burdened with legacy cost structures and too many physical locations, among other challenges. Born online retailers—not just Amazon, but companies such as Chewy, Etsy and Wayfair—may have sustainable advantages for quite some time.

The difference in retail business models is one of the reasons why ProShares looks at the retail universe through two lenses: traditional retailers and online retailers. Some traditional retailers that earn at least 75% of their revenue from in-store sales, such as Walmart and Target, are tracked in the Solactive-ProShares Bricks and Mortar Retail Store Index. Conversely, some retailers who sell principally online or through other non-store channels are tracked by the ProShares Online Retail Index, which includes Amazon, Alibaba, Chewy and Wayfair.

E-Commerce: It’s More Than Amazon

Source: Bloomberg. Date range: 5/17/2018 - 5/17/2021

Looking at which companies were responsible for the 100%+ return of the ProShares Online Retail index over the past three years, Amazon accounted for about a quarter. In e-commerce, economies of scale matter. Amazon’s average weight in the index during the three-year time period (24.11%), which was in line with its contribution to the index’s return, well matches its size and impact. But there were many other impactful e-commerce companies. The chart above shows some of the other companies, out of the 20+ index constituents, that are thriving alongside Amazon and have contributed to the index’s performance.

Invest in Retail Disruption
Prior to the pandemic, the retail industry was already undergoing massive shifts, and e-commerce’s share of the pie had been steadily increasing for years. If growth trends continue, investors may want to consider strategies that focus on companies designed for a digital environment.

ProShares offers two ETFs that enable investors to access the changing retail landscape:

ProShares Online Retail ETF (ONLN)

Lets investors tap into the potential growth of online retail by pinpointing retailers that principally sell online or through other non-store channels.

ProShares Long Online/Short Stores ETF (CLIX)

Tap into the potential growth of online retail and the decline of bricks-and-mortar retailers through a long/short construction.

Important Information

As of 3/31/2021, ONLN allocations included 25.38% to Amazon, 11.40% to Alibaba, 3.79% to Chewy, 5.88% to Wayfair, 4.70% to Etsy, 1.70% to Pinduoduo Inc., 3.60% to, and 0% allocations to Target and Walmart. CLIX included long-side allocations of 25.37% to Amazon, 11.42% to Alibaba, 3.80% to Chewy, 5.89% to Wayfair, 4.71% to Etsy, 1.70% to Pinduoduo Inc., and 3.60% to CLIX short-side exposure included 2.12% to Walmart, 2.16% to Macy’s and 2.25% to Target. Holdings are subject to change.

This is not intended to be investment advice. There is no guarantee forecasts will be met. Past performance does not guarantee future results.

Indexes are unmanaged and one cannot invest in an index.

Shares are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Market price returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. ET (when NAV is normally determined for most funds) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns.

Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Investing is currently subject to additional risks and uncertainties related to COVID-19, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and world economic and political developments.

Investing involves risk, including the possible loss of principal. These ProShares ETFs are non-diversified and entail certain risks, which may include risks associated with the use of derivatives (such as swap agreements, futures contracts and similar instruments), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance.

CLIX’s short positions are not intended to hedge the portfolio in market downturns, but rather to allow stocks with unfavorable outlooks to contribute to performance. Short positions lose value as security prices increase.

Investments in the consumer discretionary and retailing industries are subject to risks such as changes in domestic and international economies, interest rates, competition and consumer confidence; disposable household income; consumer tastes and preferences; intense competition; changing demographics; marketing and public perception; and dependence on third-party suppliers and distribution systems. Investments in smaller companies typically exhibit higher volatility.

Smaller company stocks also may trade at greater spreads or lower trading volumes, and may be less liquid than stocks of larger companies.

ONLN and CLIX invest in international investments, which may involve risks from: geographic concentration, differences in valuation and valuation times, unfavorable fluctuations in currency, differences in generally accepted accounting principles, and from economic or political instability. In emerging markets, many risks are heightened, and lower trading volumes may occur. Please see their summary and full prospectuses for a more complete description of risks. There is no guarantee any ProShares ETF will achieve its investment objective.

"Solactive AG," a registered trademark of Solactive AG, and the Solactive-ProShares Bricks and Mortar Retail Store Index have been licensed for use by ProShare Advisors LLC. Solactive AG serves as index calculation agent for the ProShares Long Online/Short Stores Index, ProShares Online Retail Index and Solactive-ProShares Bricks and Mortar Retail Store Index, and performs routine daily calculations and maintenance (e.g., reconstitution, rebalancing, and corporate actions). Solactive AG uses its best efforts to ensure that these indexes are calculated correctly. Solactive AG has no obligation to point out errors in the indexes to third parties, including but not limited to investors and/or financial intermediaries. Neither the ProShares Decline of the Retail Store ETF ("EMTY") nor the ProShares Long Online/Short Stores ETF (CLIX) are sponsored, endorsed, sold, or promoted by Solactive AG and they make no representation regarding the legality or suitability of the funds, or the advisability of investing in the funds. SOLACTIVE AG AND ITS AFFILIATES MAKE NO WARRANTIES, EXPRESS OR IMPLIED, AND BEAR NO LIABILITY WITH RESPECT TO THE INDEXES, PROSHARES, OR THE FUNDS.

Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing.

ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds' advisor or sponsor.

Simeon Hyman, CFA, joined ProShares in 2013 as head of investment strategy. He leads ProShares’ team of investment professionals engaged in portfolio analysis, product research and development, education and the delivery of investment strategies using the company’s alternative ETFs. Hyman earned bachelor’s and master’s degrees in economics from the University of Connecticut, and an MBA from Columbia Business School. He holds Series 7, 24, 63 and 66 FINRA designations.