PETERBOROUGH, ENGLAND - NOVEMBER 15: A close-up of a packaged Amazon Prime item in the Amazon Fulfilment centre on November 15, 2017 in Peterborough, England. A report in the US has suggested that over half of all online purchases this Christmas will be made with Amazon. (Photo by Leon Neal/Getty Images)

With Black Friday, pre Back Friday and Cyber Monday in the books​, we all know about how e-commerce is swamping traditional brick-and-mortar retailing. To be fair, it’s not as if malls and stores have been empty — they haven’t been. But we know where the business is moving. So do we just buy Amazon and call it a day? 

Look Up And Sneer

We have a long tradition in our society of taking pot shots at winners. The New York Yankees stink and have since the early 1900s. The New England Patriots stink and Bill Belichik is a creep. LeBron James is a loser and so is Kevin Durant. Only rotten movies win Oscars. Jeff Bezos is a rotten CEO and Amazon.com is overrated.

We’ve really heard the hate when it comes to Amazon. The stock is overpriced. The company’s fundamentals are lousy. Anybody can match Amazon’s prices. If Amazon has to charge sales taxes, it’ll all be over. Wal Mart will kill them. Bezos is mean to employees. Kindle will never catch on. Echo will never catch on. Its cloud services is all talk. Amazon’s mobile phone will fail: Well what do you know; the naysayers couldn’t he be all wrong all the time — unless they shorted Amazon stock expecting the phone fiasco to give the company its comeuppance. 

The final chapter is far from written. I have no idea how the new Amazon bookstore chain will fare and when it comes to the ultimate results of the Whole Foods acquisition, those who know don’t exist and those who don’t know always seem to have a heck of a lot to say. But here’s something I think we can and do know. Betting against Jeff Bezos and Amazon has not been a winning strategy. 

You could simply buy Amazon . . . .

The company is solidly in the black — it seems like only yesterday since all anyone seemed to talk about were red ink and thin margins — and further expansion seems highly likely (I hate using words like “inevitable” or “assured” when writing about stocks). Share valuation is high (pick a metric, any metric) but that only matters if you think the company will be unable to grow into the valuation. Eventually, that will turn out to be the case. But is it now? Again, those who know don’t exist and those who don’t know always seem to have a heck of a lot to say.

. . . or you could hedge . . .

Options traders don’t need me to elaborate. But for those who don’t like options or can’t or have accounts that can’t trade them, ProShares gives us an interesting alternative. It just launched the ProShares Long Online/Short Store ETF (CLIX). This is a portfolio consisting of 21 long positions in shares of companies that sell primarily online or at least through non-store channels, offset by a 50% short position in something called the Solactive-ProShares Bricks and Mortar Retail Store Index, which has 56 constituents all of which are primarily dedicated to traditional retail.

Amazon is the biggest holding in the long portion of the fund (about 25% of the long investments).

The Solactive portion is not really a set of short positions, so if you hate the idea of going short (possible margin calls, potential unlimited losses), don’t worry. The actual investing is in derivatives whose value is pegged to the daily change of the value of the index times minus 1. (The details are the sort of thing people who majored in math but didn’t want to go into teaching worry about.)

This is interesting because it gets you off the hook for some of the Amazon risk. You don’t have to worry so much that the market will go down, because you do have a significant short stake. You aren’t so much investing in e-commerce but in the superiority of e-commerce relative to brick-and-mortar.

The short play isn’t perfect. The measure is the daily movement in the market; not a monthly, quarterly or annual thing. Compounding daily can lead to weird things so make sure you understand this sort of fund: Google “inverse etfs,” “short etfs,” “reverse etfs” and phrases like that and read up a bit. But at least the short position here isn’t leveraged (the daily price change of the index multiplied by minus 2 or minus 3) so your exposure to oddities is lessened. Generally speaking, though, if brick-and-mortar continues to underperform e-commerce, CLIX is an ETF that should be worth owning.

. . . or you could refine the hedge.

Is it REALLY e-commerce vs. brick-and-mortar, or might it be Amazon versus brick-and-mortar? As noted, Amazon is only about 25% of the long portion of CLIX. The number two long holding is Alibaba at about 16% of the long position. Then we start raising our eyebrows a bit.

Netflix is a bit more than 4%. Do we really want this? Shouldn’t we own or not own Netflix as a new-era media play? There’s a similar stake in Nutri-system. This, too, may or may not be a good stock, but is it really a retailing play as opposed to a lifestyle or health play? 

The flower-delivery and gift companies (1-800 Flowers and FTD) are represented as are the home shopping TV channels and eBay. So, too, is Groupon. Do we really need to drag those along in our Amazon versus brick and mortar play? And Shutterfly?

I set up hypothetical portfolios on portfolio123.com; one consisted of a single stock, Amazon, and the other consisted of equal positions in the other 20 stocks that were placed by ProShares into the long portion of the CLIX ETF. Figure 1 shows how those two hypothetical portfolios (Amazon in red, the other 20 stocks in blue) would have performed over the past three years.

Figure 1

Marc Gerstein, Portfolio123

A backtested comparison showing Amazon versus other Long Online/Short Store long positions

I repeat: do we really want or need the other 20 stocks Long Online/Short Store grabbed for the long portion of its portfolio.

There is another choice. You could buy a different ProShares ETF that contains only the short portion of CLIX. It’s known as the ProShares Decline of the Retail Store ETF (EMTY). If you do that, you’d have short exposure (computed daily — remember to do your homework on this) to a portfolio of retail stocks that would, according to a Portfolio123 backtest, have performed like this over the past three years.

Figure 2

Marc Gerstein, Portfolio123

Backtested performance of traditional retailers included in Decline of the Retail Store

So you could, if you wish, create a customized purer Amazon-versus-the world version of Long CLIX by owning a stake in Amazon and then investing an amount equal to half the value of your Amazon position into EMTY (by the way, you have to love the ProShares’ choice of tickers! If you don’t get it, well ...

Or, you could readjust the balance. You could put half your retail-war position in Amazon and half in EMTY if you’re even more bearish on traditional retail. And if you’re worried about the market has a whole, having stronger short exposure wouldn’t be the worst thing in the world.