With inflation the biggest focus in financial markets lately, it’s easy to forget how strong the economy is. On Wednesday, investors were reminded of that when the Census Bureau reported the latest data on retail sales.
According to the agency, U.S. retail sales jumped 12.3% on a year-over-year basis in January. The strong start to the year comes on top of the 19.3% surge in retail sales during all of 2021.
While most retail categories are seeing growth, consumers are spending most of their cash in physical establishments. Just as in 2021, e-commerce is growing more slowly than brick-and-mortar retail.
In January, nonstore retailers—a group that primary includes online retailers—grew their sales by 8.9% over the same period a year ago, down from 2021’s full-year average growth rate of 13.6% and 2020’s full-year average growth rate of 22.1%.
Perhaps this isn’t all that shocking. E-commerce sales surged at the expense of brick-and-mortar sales during the early parts of the pandemic. Once economies opened back up and people felt comfortable resuming their normal activities, those trends are reversing (sort of).
E-commerce sales are still at a record high, and they never swooned like sales at physical stores did in 2020. Even with recent slower growth, online sales as a percentage of total retail sales are still historically high, though they’ve backed off the spiky levels of 2020.
E-commerce Sales As A % Of Total Retail Sales
Over the past two decades, the median growth of e-commerce sales has been 18% per year, while e-commerce market share has ticked up anywhere from half a percent to one percent each year, a trend that is anticipated to continue for the foreseeable future.
In other words, short-term, the growth of e-commerce is slowing, but the long-term bullish growth prospects of the industry haven’t changed.
Cut In Half
The long-term trajectory of e-commerce is little solace for recent investors in online-retailer-focused ETFs. Funds like the ProShares Online Retail ETF (ONLN) and the Amplify Online Retail ETF (IBUY) have been cut in half from their highs of last year as investors fret about the growth slowdown in the space.
IBUY holds a global basket of retailers that derive at least 70% of their sales online. U.S. stocks make up about three-quarters of the fund, while international stocks make up the rest. Stocks are equal-weighted in the portfolio. Current top holdings include Expedia, Groupon, Booking Holdings, Airbnb, Amazon, Chegg and TripAdvisor.
Meanwhile, ONLN is a global, market-cap-weighted ETF, with familiar top holdings like Amazon, Alibaba, eBay, JD.com, Chewy and DoorDash.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Over the past year, ONLN and IBUY are down 46% and 47%, respectively. Compare that to two ETFs that are much more heavily weighted toward brick-and-mortar retailers, the SPDR S&P Retail ETF (XRT) and the VanEck Retail ETF (RTH), which are up 3% and 12%, respectively, over the past year.
XRT holds an equal-weighted basket of retail stocks selected from the S&P Total Market Index, while RTH holds a highly concentrated basket of the 25 largest U.S.-listed retailers and market-cap-weights them.
XRT and RTH are polar opposites when it comes to their weighting schemes, but both strategies have easily outperformed the e-commerce-focused IBUY and ONLN over the past year.
Will that outperformance continue, or will the tide turn back in favor of the e-commerce funds?
The long-term, secular trends suggest that online retail ETFs will have their day in the sun again, and a 50% haircut makes the funds interesting. On the other hand, American consumers seem to be fully embracing a return to normalcy after a few tough years in the midst of the pandemic.
One can imagine that shopping in-person is part of that normalcy for many Americans, even if they do more shopping online today than they did two years ago. It’s possible that the economic reopening—including visits to brick-and-mortar retailers—hasn’t yet peaked.
If that’s the case, XRT and RTH may have some more potential to outperform.
Follow Sumit Roy on Twitter @sumitroy2