If there’s one time of year when retail stocks are top of mind for investors, it’s the span from just before Thanksgiving to just after New Year’s. After purchasing items for the Thanksgiving meal, we see Black Friday, Small Business Saturday and Cyber Monday in rapid succession. Then it’s just a few weeks to finish up your Christmas shopping and prepare for the New Year’s parties. But how should investors get in on the action? There’s always the option to try to pick the winners one at a time, but savvy investors can play the whole space with retail-based exchange-traded funds, or ETFs. And that’s where the ProShares Online Retail ETF (NYSEARCA:ONLN) and the ProShares Long Online/Short Stores ETF (NYSEARCA:CLIX) come in.
Certainly, thanks to the pandemic, this season will look different in 2020. Stores are allowing limited traffic, so more shoppers are turning to the internet. And the reach of those retail holidays has stretched more than in recent years. But that just makes these e-commerce ETFs all the more interesting.
I had a chance to discuss the ONLN and CLIX ETFs with ProShares Global Investment Strategist Simeon Hyman, CFA, and talk about what investors can expect with CLIX and ONLN.
InvestorPlace: Can you discuss the differences between CLIX and ONLN?
ProShares Global Investment Strategist Simeon Hyman, CFA: Both ETFs present opportunities to invest in the opportunity presented by the incessant growth of online retail.
ONLN, ProShares Online Retail ETF lets investors tap into the potential growth of online retail by following a long-only strategy that tracks the performance of the ProShares Online Retail Index.
CLIX taps into both the growth of online retail and the decline of brick and mortar retail by following a long-short strategy tracking the ProShares Long Online/Short Stores index that combines a 100% long position in retailers that primarily sell online with a 50% short position in those that primarily rely on physical stores,
InvestorPlace: What types of investors should consider CLIX? How about ONLN?
ProShares: Themes are often difficult to capture through traditional investment vehicles. For example, nearly all of CLIX’s holdings are actually members of the consumer discretionary sector. And traditional retail indices such as the S&P Retail Select Index contain a mix of online and bricks and mortar retailers. From a portfolio construction perspective, both ETFs can be used by investors looking for either thematic satellites to their core equity positions, or as targeted growth sleeves in their core equity allocation.
InvestorPlace: How does the modified market-cap-weighted approach to e-commerce that ONLN uses balance the strength of big players with the innovation of smaller disruptors?
ProShares: Scale is quite important in online retail and the approach appropriately allocates larger positions to the two behemoths, Amazon and Alibaba. The construction still allows for meaningful diversification, and holds notable positions in many key players that are carving out profitable niches such as: Chewy who’s subscription model is a key barrier to entry, and Etsy whose tremendous volume of mask sales were enabled by its flexible model.
InvestorPlace: Deloitte currently expects retail sales for the holidays to grow 1% to 1.5% in 2020, lower than recent years. In an age of coronavirus, how should investors think about that statistic?
ProShares: The consumer had been holding up surprisingly well, but October’s retail sales report showed some weakness, particularly in apparel and department stores. These segments of bricks and mortar retailing may face quite a challenging holiday season.
InvestorPlace: By contrast, e-commerce continues to climb – holiday e-commerce sales in the U.S. grew by over 13% in 2019, but the International Council of Shopping Centers sees a 25% jump this year. Is that mostly due to the Covid-19 threat, or have we reached a tipping point in ecommerce?
ProShares: 25% may prove to be a conservative forecast. Third quarter ecommerce sales grew 37% year-over-year in the US. That level of increase in ecommerce may be likely even if overall retail sales are a bit soft. Even if bricks-and-mortar stores can remain relatively unrestricted, surging Covid-19 cases may still put a damper on in-person store traffic. Looking at the bigger picture however, e-commerce still only accounted for just over 14% of all retail sales in the third quarter. E-commerce’s growth has a long way to go, and the pace may be a healthy one.
InvestorPlace: What other changes has Covid-19 wrought on shopping habits? How permanent do you believe these changes are?
ProShares: One of the reasons that the pandemic-driven acceleration of e-commerce is likely to persist is that growth has come from both the greatest and least penetrated categories. Apparel and accessories saw y-o-y growth of 46% in Q2, and 34% in Q3. That’s a trend that was perhaps almost a given. More surprising: Food and Beverage has seen the greatest increase, growing 320% y-o-y% in q2 and 260% in q3—and remember that grocery stores are considered essential businesses and were never forced to close. Perhaps more consumers no longer feel it necessary to hand pick their produce and browse physical grocery aisles? Importantly, technological advances are rapidly improving the ability of companies to deliver an order consisting of many small items profitably.
InvestorPlace: Both ONLN and CLIX are up over 70% so far this year, while the S&P 500 has gained about 10%. What about their makeup helps them in the face of the difficulties 2020 has given us?
ProShares: ONLN and CLIX tap into a sweet spot of a trend that was well-in place long before the pandemic, was accelerated by the pandemic, and likely to persist long after the pandemic.
InvestorPlace: As e-commerce grows, bricks-and-mortar locations are struggling – even before all the stay-at-home orders. What do you see as the future for that segment of retail?
ProShares: E-commerce’s march is relentless. And the US is the most overstored market in the world. The retail apocalypse is unlikely to abate anytime soon. The steady-state mix of online and physical retail is a long, long way off. Even those bricks and mortar retailers that have some omnichannel success may not thrive. WalMart is now the number two online retailer, but its reward for during much of this online expansion has been shrinking margins, while Amazon’s profitability continued to expand. Several legacy bricks and mortar players are currently heavily promoting curbside pickup as a value-added offering. Perhaps another reason for this emphasis is that they are just not that good at delivering stuff to your door.
InvestorPlace: What do you believe the major opportunities are going to be in retail over the next few years?
ProShares: The Amazon juggernaut may have more room to run. Witness the recent announcement of Amazon Pharmacy. And Amazon’s top line is still substantially smaller than WalMart’s. But just how a generation (or two…) ago WalMart did not kill all retailers, a number of niche players will likely prove their ability to thrive. Whether it’s the Chewy model of subscriptions and personal relationships, or Etsy’s flexible marketplace, or the even the counterintuitive Stitch Fix move away from subscription only business, investors would be wise to keep in mind that the e-commerce opportunity isn’t just about Amazon.
On the date of publication, Jessica Loder did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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