Online Retailers Boosting ETF Returns

If you’ve been invested in gold this year, you must feel pretty smug right now. Several bullion-based ETFs occupy high spots on the year-to-date return table. But not the tippy-top spots. No, that distinction actually belongs to online retail funds.

It’s no wonder. Shelter-at-home orders and social distancing mandates have compelled many consumers to opt for online ordering of food and other goods in lieu of visiting brick-and-mortar retailers. Clearly, the pandemic has changed consumers’ buying dynamics. As people get more and more accustomed to online activity, the greater the likelihood of this mode persisting in the post-pandemic world.

Consumer spending has long been a mainstay of the U.S. economy, contributing 70% of the nation’s GDP. Consumer stocks, particularly cyclicals, are also powerful drivers of the broad equity market.Cyclicals, led by Amazon.com, account for 11% of the capitalization of the S&P 500 as proxied by the SPDR S&P 500 Trust (NYSE Arca: SPY). And you can see how these issues, represented by the Consumer Discretionary Select Sector SPDR (NYSE Arca: XLY), led SPY out of the Great Recession in the chart below.  

(Click on image to enlarge)

xly-spy-retailers.png

Amazon (AMZN) is the 800-lb. gorilla in both ETFs’ portfolios, taking up nearly 5% of SPY’s heft and 24% of XLY’s. That degree of concentration makes some advisors absolutely dyspeptic. For good reason. Just look at the drawdowns suffered by the two ETFs in February. XLY’s was 200 basis points worse than SPY’s.

For those looking to tap into online retailing’s future without undue exposure to a single entity, there are three ETFs that may offer more diverse coverage of the sector.

The eldest is the Amplify Online Retail ETF (Nasdaq: IBUY), a global portfolio of companies deriving at least 70% of their revenue from online or other non-store channels. Domestic issues account for three-quarters of the asset mix; the balance is given over to foreign stocks. Within each basket, components are equally weighted, reducing the influence of behemoths like Amazon and giving more play to smaller stocks. Amazon, in fact, accounts for only a little over 2% of IBUY’s $973 million capitalization. Investors pay an annual expense of 65 basis points for holding the 48-stock index tracker. Year to date, IBUY’s gained 79%.

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Disclosure: None.

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