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ProShares Online Retail ETF: Buy Dozens of Online Leaders With a Single Ticker

Amazon isn't the only game in town

online retail stocks - ProShares Online Retail ETF: Buy Dozens of Online Leaders With a Single Ticker

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The “retailpocalypse,” as it’s come to be known, is in full gear. The past several years has seen the landscape littered with the graves of previous retail stalwarts, and it’s only picked up steam in 2020. This year, more than 40 retailers have filed for bankruptcy (versus 2019’s 32 retail bankruptcies), including names such as JCPenney (OTCMKTS:JCPNQ), Pier 1 Imports (OTCMKTS:PIRRQ) and Neiman Marcus. The impact of the novel coronavirus has accelerated the disruption of online retail stocks, which is where ProShares Online Retail ETF (NYSEARCA:ONLN) steps in.

The exchange-traded fund seeks to give investors a basket of diversified online retail stocks that are leaders in their space. I’ve spoken with ProShare’s global investment strategist, Simeon Hyman, previously about its ex-energy ETF and its long online/short stores ETF. And now Hyman has elaborated on ProShares online retail ETF, ONLN, which gives investors exposure to the online retail stocks reshaping the space.

Read on to hear Hyman’s thoughts on ONLN, and why it’s an ETF to buy for investors looking for profits among the retail disruptors:

John Kilhefner, Managing Editor, InvestorPlace: Can you elaborate on the digital shopping channel criteria used to determine ONLN’s holdings?

Simeon Hyman, Global Investment Strategist, ProShares: ONLN lets investors tap into the potential growth of online retail by pinpointing retailers that principally sell online or through other non-store channels as captured by standard industry classification systems. The key is recognizing that not all online retailers are created equal, and the ETF zeroes in on the companies reshaping the retail space, like Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA). ONLN’s modified market-cap weighting puts emphasis on the leaders, while also providing industry diversification with over 25 holdings.

InvestorPlace: Given that Amazon is up 77%, Alibaba is up 29% and Chewy (NYSE:CHWY) stock is up 109% year-to-date, it’s clear that online retail stocks have been on a tear. What would you say to those who believe online retailers are overvalued right now?

Hyman: The U.S. Census Bureau recently released their e-commerce report for the second quarter, the first quarter that felt the impact of the pandemic in its entirety. The report showed a dramatic increase in total e-commerce sales as well as penetration. E-commerce sales increased 31.8% from the first quarter, while retail sales overall declined 3.9%. But e-commerce only accounts for around 16% of total retail sales, meaning we are still maybe in the early innings of a transformative trend.

InvestorPlace: E-commerce growth has surged and the novel coronavirus has only accelerated that growth. If the pandemic were to miraculously disappear tomorrow, however, which factors would continue to propel digital shopping growth?

Hyman: It is tempting to chalk this up to a temporary impact of the pandemic, but there are signs that this pandemic is accelerating an existing long-term trend and furthering opportunities for e-commerce growth. One glaring example: e-commerce food and beverage sales increased over 100% from the first quarter, and over 220% over the second quarter of last year. Remember, groceries stores and some restaurants were considered essential businesses and open during the entire lockdown period. While online retail has grown, malls have emptied and stores have shuttered stores, even during what — until the pandemic — was a strong U.S. economy. The pandemic has, of course, intensified the rate with recent predictions putting 2020’s store closure rate at more than double that of 2019, which was already a record-breaking year. As such, new habits or tends may be hard to break.

InvestorPlace: As traditional retailers pivot to e-commerce, what are the most important attributes for companies to keep in mind when creating digital shopping channels?

Hyman: Even for those legacy brick-and-mortar companies that are having some success in online retail and creating an “omni channel” model, the future may not be so bright. Over the last several years, as Walmart (NYSE:WMT) has successfully grown its online business to the coveted second-place position, its margins have declined. Meanwhile, as Amazon continues to grow, its margins have expanded, serving as reminder of the performance challenges facing even those brick-and-mortar retailers who are having online success. Legacy cost structures, bloated footprints and multiple distribution platforms all pose long-term profitability challenges. It’s another key reason, that indeed, the distinction between online and brick-and-mortar retail is still an investment distinction worth making.

InvestorPlace: Which online retailer looks best positioned to become the next Amazon? If none, is it likely that we’ll see another company disrupt the space the way Amazon has?

Hyman: Perhaps a better question is what online retailers look best positioned to co-exist profitably with Amazon. Scanning the 25 companies included in ONLN, one can see a range of strategies that are emerging. Some of these successful companies are dedicated to narrow market segments. Some are focused on other geographies around the world. The rules for success online are likely to be much like the rules of retail have always been: a strong brand and brand experience, a compelling value proposition, and enduring customer relationships.

InvestorPlace: What would you like to say to prospective ONLN investors?

Hyman: ONLN provides the opportunity to invest in the long-term retail disruption trend.

ONLN gives access to iconic players that are reshaping the retail world. Rather than restricting your investment to an individual company, ONLN makes it possible to gain exposure to multiple leaders in the rise of e-commerce through a single ticker.

On the date of publication, John Kilhefner did not have (either directly or indirectly) any positions in the securities mentioned in this article.

In The InvestorPlace Q&A, we invite a manager to speak directly to Main Street investors, whether discussing their firm’s technologies, strategies or investments for the year ahead. Our goal is to put the spotlight on fund managers and other institutional investors of note, providing a detailed look into their management styles, world views and investing strategies. Read past interviews here.


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