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Bad News For Stores, Good News For This ETF

ETF Professor

More and more, investors are hearing about the rise of e-commerce and online retail sales. Related to that theme, investors are hearing more about the demise of brick-and-mortar retail stores.

Earlier this year, it was reported that in just the first seven weeks of the year, 2,200 physical stores were shuttered, but some analysts expect that number to increase in exponential fashion.

What Happened

Issuers of exchange traded funds are hip to the shift of retail sales from stores to computers, smartphones and tablets. The ProShares Decline of the Retail Store ETF (NYSE: EMTY) is designed to benefit from the decline of the brick-and-mortar retailer.

EMTY, which debuted in November 2017, “seeks capital appreciation from the decline of bricks-and-mortar retailers through short exposure (-1x) to the Solactive-ProShares Bricks and Mortar Retail Store Index,” according to ProShares.

Why It's Important

“An estimated 75,000 stores that sell clothing, electronics and furniture will close by 2026, when online shopping is expected to make up 25 percent of retail sales, according to UBS,” reports The Washington Post.

EMTY's underlying index requires member firms to generate at least half their revenue from retail sales while mandating that 75 percent of those sales take place in physical stores.

“[UBS] analysts said the closures would affect a broad variety of retailers, affecting an estimated 21,000 apparel stores, 10,000 consumer electronics stores and 8,000 home furnishing stores,” according to The Washington Post.

Should those numbers prove accurate, that would be just fine with EMTY investors. As of the end of last year, EMTY's underlying index allocated nearly 32 percent of its weight to apparel retailers with home improvement and electronics retailers combining for almost 11 percent of the benchmark's weight.

While getting to 75,000 store closures by 2026 may seem like a lot, consider this: the UBS analysts note there have been more than 15,000 store closings since 2017.

What's Next

Not all of the retailers in EMTY's index will disappear. Some are massive enterprises with improving online presences, including Walmart Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT). Others, such as Tiffany & Co. (NYSE: TIF) cater to high end consumers.

Still, the trends favor the shift to online retail, a fact confirmed by 35 U.S. retailers filing for bankruptcy since 2016.

“Americans are increasingly shopping online. The average U.S. household spent $5,200 online last year, up nearly 50 percent from five years earlier,” according to the Post.

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