Online Retail ETFs Not One Size Fits All

August 19, 2021

The shift to online retail was already underway, but COVID’s stay-at-home orders and social distancing have accelerated the shift in consumer behavior in the last year.

E-commerce increased by 32% from the first to second quarter of 2020, according to data from the U.S. Census Bureau.

There are signs that this trend is set to continue, with the Census Bureau reporting a nearly 8% quarterly increase in online retail sales during the first quarter of 2021.

For investors looking to take part in this theme, several thematic ETFs offer exposure to this space. Looking under the hood reveals that these funds all take a very different approach when it comes to portfolio construction.

Market Cap Vs Equal Weight

Two ETFs are the big players in this space, holding approximately $1 billion in assets each.

The Amplify Online Retail ETF (IBUY) was the first to market, launching in April 2016. The ProShares Online Retail ETF (ONLN) hit the shelves two years later.

While these funds both have “online retail” in the name, the portfolios are significantly different.

 

Top10

Source: FactSet

(For a larger view, click on the image above)

 

IBUY uses an equal-weighted approach to build the portfolio, meaning its largest holding makes up just over 3% of the portfolio. ONLN uses a market-cap-weighted approach, leading Amazon and Alibaba to make up over a one-third of the portfolio given their dominance in the online retail space.

IBUY’s equal-weighting approach has allowed it to outpace ONLN over the past year. In large part, this has been due to Amazon’s lackluster stock performance over the same period.

 

Chart courtesy of StockCharts.com

 

Heavy Amazon Weighting Now A Drag

There is no question that Amazon dominates the online retail space, but as ONLN’s performance demonstrates, any ETF with a significant weighting in a single stock is prone to the risk of underperformance should that stock struggle. That’s the antithesis to true index investing’s aim of playing the market broadly.

While Amazon dominates the online retail space, it is also important to note that a significant portion of its revenues come from other business lines. Amazon Web Services accounted for nearly 55% of Amazon’s total operating income in the second quarter.

While this business line has bright prospects, those looking for a pure play on e-commerce should consider that Amazon’s stock price could be impacted by more than the company’s online sales.

On the other hand, there is no question that Amazon dominates the online retail space, projected to capture nearly half of e-commerce sales this year. A recent research report from J.P. Morgan projects Amazon will overtake Walmart as the largest U.S. retailer in 2022.

Expanding On The Theme

Another fund offering exposure to this theme is the Global X E-commerce ETF (EBIZ). In addition to online retailers, this fund also includes companies that support online marketplace platforms or provide software or services to facilitate e-commerce; however, they must generate at least 50% of revenues from these business operations.

The index that the fund tracks is market-cap-weighted, but places a 4% cap on a single company’s weight. The resulting top 10 looks significantly different from either ONLN or IBUY.
 

 

Top10_EBIZ

Source: FactSet

(For a larger view, click on the image above)

 

ONLN and IBUY both cap non-U.S. holdings at 25% of the portfolio, but EBIZ takes a slightly more globally diversified approach.

 

EBIZ_region

Source: FactSet

(For a larger view, click on the image above)

 

While Amazon is less than 4% of EBIZ’s portfolio, performance has been in line with that of ONLN and significantly underperformed IBUY for the past year.

 

Chart courtesy of StockCharts.com

 

With nearly a quarter of the portfolio in Chinese equities in EBIZ, that has been a drag on performance, as Chinese equities have tumbled on fears of further government action by Xi Jinping’s Communist Party.

Bottom Line

With several options in this category, investors should be aware that the differences in portfolio construction can have a significant impact on performance. IBUY offers a more diversified portfolio, ONLN more closely resembles market share and EBIZ offers more global diversification.

These ETFs are not one size fits all, and each offers a unique play on the online retail space. Try on before buying.

Contact Jessica Ferringer at [email protected] or follow her on Twitter

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