Some 20 years ago, a low rumbling of change began to build in the retail industry. Remember when Amazon, despite losing billions of dollars a year, started to eat the market-share lunch of bookstores?
There was clear disruption going on, but really in a small material way back then. However, there were those who saw the future, and extrapolated that what Amazon was doing to bookstores would happen across retail. Many scoffed.
Today you would hear those same scoffs if you didn’t believe that online retailers—and in particular Amazon—were not just overtaking brick-and-mortar stores who ignored the groundswell of change for years and years, but decimating them.
Divergence In Sales
Consider this: Brick-and-mortar revenue in 2016 was down $7.3 billion from 2000 levels, while online shopping revenue was higher by $35 billion last year compared to 2000.
On top of losing market share, many traditional retailers are regulars in bankruptcy court. Nearly a dozen national retailers filed for bankruptcy this year—on pace to exceed 2009, when 18 major retailers closed their doors during the worst days of the financial crisis.
First-quarter earnings released in recent weeks further confirmed what we already knew: Things are getting worse, not better, for the old retail guard.
While Amazon hit another quarterly home run, some of the country’s largest retailers—like Macy’s—were swinging and missing on earnings and revenue as they have been for a while. Store closure announcements followed. Macy’s alone is shutting down some 50 stores this year after disappointing results.
Upheaval In Retail ETF World Too
Retail is really a consumer subsector, so when it comes to ETF options, there’s not a lot to choose from. The ETF.com retail ETF channel displays only six retail ETFs listed in the U.S., and one is a leveraged fund, the $30 million Direxion Daily Retail Bull 3x Shares (RETL), which is down 10.6% this year.
Out of the other five, three offer exposure to U.S. retailers:
SPDR S&P Retail ETF (XRT): The 11-year-old fund is the biggest of all of them, with $397 million in assets under management, and equal-weights its U.S. components.
PowerShares Dynamic Retail Portfolio (PMR): This fund is actually older than XRT, but has a mere $14 million. It tracks a multifactor, tiered equal-weighted index of U.S. retail stocks.
First Trust Nasdaq Retail ETF (FTXD): FTXD tracks a liquidity-selected, multifactor-weighted index of U.S. retail companies that launched eight months ago and has $2 million in assets.
The other two focus on global retailers:
VanEck Vectors Retail ETF (RTH): This market-cap-weighted fund, which launched in 2011, has $72 million in AUM.
Amplify Online Retail (IBUY): This $25 million fund launched last year, and equal-weights companies with revenues dominated by online retail sales.
Let’s look at the year-to-date tape:
Chart courtesy of StockCharts.com
What’s In Your Retail ETF Wallet?
The chart above is telling.
IBUY, the online retail ETF, has surged 23%, while the other equal-weighted fund, and the biggest—XRT—is down nearly 4%. That disparity is all about what’s under the hood.
There are few crossover companies like Amazon. IBUY weights Amazon at 2.99%, while XRT gives it a weighting of 1.15%, but that’s not the key to the outperformance.
The 40 holdings in IBUY are dominated by global online retailers, some of which you may not have heard of before: PetMed Express, Carvana, Stamps.com, Shopify, to name a few. By comparison, XRT’s 100 holdings are dominated by the old guard of U.S. retail: Sears, Best Buy, Macy’s, Tiffany, Nordstrom, Dollar Tree, J.C. Penney.
Both ETFs own Amazon, as well as names like Liberty Interactive, Wayfair, Etsy, Shutterfly and PetMed Express. But that’s where the overlap ends. And the weights each fund assigns to these like-holdings vary dramatically as well. For instance, PetMed Express is the top holding in IBUY, at 4.1%, while it represents only 0.40% in XRT.
The contrast of these two ETFs’ makeup and current performance is an accurate picture of the upheaval in the retail industry.
Amazon Juicing Returns
The second-best-performing retail fund, Van Eck’s RTH, tracks a market-cap-weighted index of the 25 largest U.S.-listed companies that derive most of their revenue from retail. The top holding here—you guessed it—is Amazon, at 17%. Amazon share prices are up 28% for the year, obviously powering RTH to a large share of its gains.
PowerShares’ PMR, the multifactor equal-weighted fund, doesn’t own Amazon, which might help explain its 1.3% loss so far this year.
And First Trust’s FTXD, a multifactor-weighted fund, also ignores Amazon, holding among its top 10 securities brick-and-mortar stores—eBay being the only exception.
It’s hard to argue that the way we shop hasn’t radically changed over the last 20 years, or even more so over the last 30 years. It has. And some retailers have tried to adapt, offering a combination of brick-and-mortar and online retail experiences, but a lot of these retailers—such as Walmart, Target and even Tiffany—still rely on revenue from buyers who walk into a physical store.
Investors looking into the retail ETF space should be aware of the bifurcation that has taken shape. Buying into the idea that consumer spending is strong and that retail sales will go up in the future is not enough. When it comes to retail ETFs, there are two distinct paths one can take.
At the time of writing, the author held none of the securities mentioned. Drew Voros can be reached at email@example.com.