The traditional retail sector has been dominated by brick and mortar business models that have continued to lose market share to online competitors. Consumers simply don’t shop the way they used to, with a rising trend of mobile transactions and brand loyalty to dominating names such as Amazon.com, Inc. (AMZN).
When looking through the list of diversified indexes attached to the retail theme, it becomes clear that conventional wisdom has been to cast a wide net over these stocks.
Established funds like the SPDR S&P Retail (ETF) (XRT) are dominated by a broad range of apparel stocks, specialty stores and consumer staples companies.
XRT owns an equally weighted basket of roughly 100 publicly traded stocks in the retail industry and is the largest such ETF with nearly $600 million in total assets.
Another variant of this strategy is the Market Vectors Retail ETF (RTH), which sticks with only the 25 largest retail stocks in a market-cap weighted index methodology. As a result, AMZN sticks out as the top holding with over 14% of the portfolio, alongside core staples such as Wal-Mart Stores, Inc. (WMT).
IBUY: The Newest Entrant
Fortunately, a new ETF issuer has arrived on the scene to shake things up a bit. The Amplify Online Retail ETF (IBUY) recently debuted as a unique alternative to these established funds.
The focus of this passively managed ETF is to select a group of 44 stocks that derive at least 70% of their revenue from online sales. Furthermore, IBUY is arranged using modified equal-weighted criteria to allow smaller companies to have a meaningful impact on overall performance.
The underlying index was developed by EQM Indexes LLC and includes a combination of consumer discretionary stocks, travel companies and marketplace providers. It also encompasses a relatively balanced mix of small, mid and large-cap stocks. Companies such as AMZN sit side-by-side with Netflix, Inc. (NFLX), Expedia Inc (EXPE), and Stamps.com Inc. (STMP).
When I look at the holdings of this ETF, I immediately see cross-sections with comparable attributes to XRT, RTH and even the First Trust DJ Internet Index Fund (ETF) (FDN). Furthermore, 25% of the IBUY portfolio is located outside of the United States. This global slant and online focus further differentiates IBUY from its competition in the retail ETF space.
IBUY was developed and launched by Christian Magoon, who successfully brought to market the Exchange Traded Concepts Trust (YYY). The new Amplify brand will focus on delivering differentiated strategies in both growth and income categories to give ETF investors greater choices among underdeveloped sectors.
The Bottom Line on IBUY
For growth oriented investors, IBUY may offer an opportunity to access a basket of stocks in a niche area of the retail space. However, its smaller number of holdings and focused properties mean that it is most likely suitable as a tactical position.
This fund will likely experience heightened volatility versus the broader market and may be influenced by cyclical factors that are prevalent in the retail industry.
Investors considering IBUY should also note its 0.65% expense ratio is on the high side when compared to the 0.35% management fee of XRT and RTH. Of course, that differential can be easily overlooked if the trend of online sales continues to drive strong results in these stocks.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. As of this writing, he does not hold a position in any of the aforementioned securities.
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