Analyst Favors Online Retail ETFs Amid Pending Retail Sales

While there has been a burst of enthusiasm surrounding the reopening of the economy, as stores transition from online ordering and curbside pickup options to a more traditional in-store shopping format, there has been a decline in the shares of some of the major retailers, as coronavirus fears have resurfaced.

Big retailers like Nordstrom, Macy’s, Kohl’s, Urban Outfitters, and Guess have all suffered losses over the past week. Nearly all of these retailers were down between 20-30% over the last week, with retail sales data expected tomorrow. The May retail sales report, which will be released Tuesday morning, will reveal the health of the U.S. consumer amid one of the most devastating global pandemics in modern times.

After April’s record decline in retail sales, May numbers are anticipated to be more promising, with other recent positive economic data like unemployment driving markets higher. Consumer spending may not be robust yet, but economists project online sales were steady, continuing their strong showing. Even spending in the thrashed core components sector is expected to have improved in May.

“Nonessential business activity, various high-frequency estimates of consumer spending data indicated solid increases in major discretionary categories in May following historical declines in April,” Nomura economist Lewis Alexander said in a note June 12.

Alexander noted that, consistent with recent data from WardsAutos, sales at auto and auto parts dealerships likely rebounded double digits. Yet, spending at restaurants is projected to have improved only modestly, according to Alexander. “Although data from OpenTable, an online restaurant booking service, indicated some improvement in seated diner volume, sales at restaurants were likely weaker than the seasonal ramp-up in sales during late spring, weighing on the seasonally adjusted estimate.”

Credit Suisse economist James Sweeney said in a note to clients June 11, that while retail sales in May will have rebounded from April’s precipitous drops, the recovery will be slow.

“Consumer spending should start to recover in May as the country emerges from nationwide lockdown. However, the recovery will only be gradual as reopening happens in phases and consumer behavior shifts. With confidence still depressed and the labor market impaired, consumption is likely to take years to recover despite recent fiscal relief helping to support household income,” he said.

While the retail recovery for conventional stores may be slower than expected, analysts are suggesting investors consider another retail segment: online.

“For the traditional brick and mortar retail industry, we would recommend avoiding them,” cautioned Ari Wald of Oppenheimer on CNBC. “But there is a piece of retail that we are bullish on, and that’s internet retail,” he added.

Wald mentions that online retail ETFs may be a place to allocate funds as the economy reopens.

The Amplify Online Retail ETF (IBUY) is one fund that investors looking to stay involved with retail can consider. IBUY rallied 2.19% Monday and has been upward trending since March. The ProShares Online Retail ETF (ONLN) has shown similar gains, adding 2% Monday, and also trending higher since March.

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