Playing Retail Resilience With ETFs

2020 will surely go down as one of the most topsy-turvy years for retail sales in history. The stunning drop in retail sales at the start of the pandemic was impossible to foresee—and so was the rebound in retail sales to all-time highs over the past few months.

Thanks to enormous amounts of government support—in the form of direct payments, unemployment insurance, record-low mortgage rates, and more—the U.S. consumer has been able to make it through the pandemic in astoundingly good shape … at least so far.

According to the Census Bureau, retail sales were 5.7% higher than the year-ago period in October, the fifth straight month in which sales were higher than in 2019. That’s an incredibly strong showing for retail sales, which many had imagined would be in much more dire shape following the onset of the pandemic.

US Retail Sales (YoY % Change)

Concerns Linger
That said, there’s been some concern that retail sales only increased by 0.3% from September to October, less than the 0.5% increase economists were looking for, and the lowest month-over-month change since April.

The question now is, can consumers hold up in the face of waning stimulus support and another big spike in COVID-19 cases? That’s the near-term challenge; looking out several months from now, consumers may be greeted by a much brighter economic backdrop in 2021 thanks to a successful vaccine.

Meanwhile, e-commerce sales should continue boom in the short term. The Census Bureau reported that online sales were up a whopping 29.1% year-over-year in October, a hefty growth rate that should sustain through the upcoming holiday season.

But how much of that growth is already priced into surging e-commerce stocks?

In a more normalized post-COVID world, perhaps e-commerce names will cool off as their beaten-down brick-and-mortar counterparts take off. Or maybe the market will focus on the long-term secular shift from offline to online, keeping e-commerce stocks high and brick-and-mortar stocks low.

These are the ideas and questions that investors will have to grapple with as we gear up for a particularly unpredictable holiday shopping season. Whichever scenario comes to pass, investors have multitudes of ETF options to mold their retail exposure as they see fit. Following are some of them.

The Broad Sector Choice
The $17 billion Consumer Discretionary Select Sector SPDR Fund (XLY) is not exclusively a retail ETF, but it has about 58% of its portfolio tied to that industry. That includes a 22% position in Amazon, an 11% position in Home Depot and a 6% position in Nike.

XLY—which is up 23.7% year to date, doubled the gain in the S&P 500—may be a good option for heavy exposure to retail stocks, but its holdings of hotels, restaurants and car manufacturers make it far from a pure play on the space. For more targeted exposure, there are other ETFs out there.

E-commerce Options
The largest of those is the $1.1 billion Amplify Online Retail ETF (IBUY). It 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 Lyft, Tripadvisor, Qurate Retail, Lands’ End, Groupon and Expedia. IBUY is up 88.8% year to date.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Meanwhile, the $708 million ProShares Online Retail ETF (ONLN) is the second-largest retail ETF on the market, and another online-focused fund. It is a global, market-cap-weighted ETF, with familiar top holdings like Amazon, Alibaba, Chewy, Ebay and Wayfair. ONLN is up 82.2% year to date.

Investors can compare IBUY and ONLN (as well as any other ETFs) side by side using the ETF.com Comparison Tool. For example, a quick glance at the output of the tool reveals that ONLN is much more concentrated than IBUY, with 27 holdings compared to 60.

More Brick & Mortar Exposure

IBUY and ONLN are the two largest retail ETFs available for trading, both laser focused on e-commerce. However, there are a few other fund choices for investors looking for more exposure to traditional brick-and-mortar retailers.

The largest of those is the SPDR S&P Retail ETF (XRT), a $610 million fund that holds an equal-weighted basket of retail stocks selected from the S&P Total Market Index. XRT is higher by 23.8% this year.

Naturally, with its heavy exposure to brick-and-mortar retailers, the fund has performed quite poorly this year. On top of that, the fund’s equal-weighting scheme hasn’t done it any favors. The retailers that have done well this year—large, dynamic firms with strong multichannel footprints, like Walmart and Target—have the same presence in the fund as struggling companies like Macy’s and Foot Locker.

Taking the opposite strategy of XRT is rival fund VanEck Vectors Retail ETF (RTH). This $190 million ETF holds a highly concentrated basket of the 25 largest U.S.-listed retailers and market cap weights them.

The result is a portfolio heavy on top-tier retailers (both offline and online), including Amazon, Home Depot, Walmart, Lowe’s, Costco and Target. The top 10 holdings make up 72% of the fund, which has returned 28.4% so far this year.

Filtering By Stock

Retail exposure isn’t just limited to the ETFs mentioned in this story. There are several more that can be found in the ETF.com Retail ETF Channel.

There are also ancillary retail plays that may not be adequately captured in a typical retail-themed fund.

For example, delivery is a key infrastructure component of the e-commerce business. Companies like Amazon have in-house delivery capabilities. Other firms leverage the services of third parties like DoorDash and Instacart (both scheduled to soon IPO), as well as Uber, through its Uber Eats arm.

Using ETF.com’s stock finder tool, investors can search for which ETFs hold the largest positions in Uber. The Renaissance IPO ETF (IPO) has nearly 11% of its portfolio in the stock.

Similarly, investors can see which funds own large positions in UPS or FedEx. The iShares Transportation Average ETF (IYT) holds 22% of its portfolio between the two stocks.  

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2