VettaFi Voices On: The 2023 Holiday Retail Season | ETF Trends

Good morning, VettaFi Voices! Last Friday, the holiday shopping season kicked off in earnest (while I hunkered down in my house eating turkey sandwiches and waited for the initial frenzy to pass). I know the initial flurry of online retail activity was pretty strong. What do you think we can expect this year and what will it tell us about the health of the American consumer? Is there a way for ETF investors to benefit from any trends for the rest of the year?

Todd Rosenbluth, VettaFi Head of Research: I’m going to defer to Roxanna Islam and Jane Edmondson, who have both covered consumer and online trends in recent days/weeks with great content.

I know in the Rosenbluth household we got our Chanukah shopping done online. After my alma mater, the University of Michigan’s football team beat Ohio State. Had to get it in and it pays to show up early at the water cooler. But Americans have been shopping for ETFs in general. In the past month, we have seen approximately $100 billion of new money with S&P 500-based SPY, VOO, and IVV leading the way. Followed not far behind by high-yield ETFs HYG and JNK. November is not just the beginning of the holiday shopping season. It’s also when we see tax loss harvesting from mutual funds.

Heather Bell, VettaFi managing editor: Yes, I’ve got seven kids (cousin’s children, not mine!) to buy for every year for Christmas who live about 2,000 miles away. As much as I like supporting small businesses, I get almost everything over Amazon because of how much shipping costs otherwise. But I can’t order anything now or it will get there WAY too early! There’s an art to online shopping …

Amazon’s Weight Can Vary

Rosenbluth: I expect my colleagues to dive into this soon, but why wait? Amazon.com (AMZN) is a major holding of the ProShares Online Retail ETF (ONLN) — about 23% of assets. While it and all the other stocks in the Amplify Online Retail ETF (IBUY)  are less than 4%. While Amazon is a key player in this theme it is not the only online company benefitting from the secular trend.

Jen Nash, VettaFi economic and market research analyst: In October, retail sales pulled back for the first time in 7 months. I think we will see a bounce back in sales from holiday shopping, but it may be tempered. Consumers have been facing a lot of economic headwinds like inflation, high interest rates, student loan repayments, dwindling savings, and slower job and wage growth — and yet they’ve continued to spend.

Some of these obstacles took a little longer for the consumer to actually feel in their wallet. This could be a partial explanation for the disconnect seen between strong consumer spending and weak consumer confidence. However, I believe consumers are starting to feel the impact more and more which has led to a lot of deal-searching and discount shopping for the holidays.

Roxanna Islam, VettaFi head of sector and industry research: Yes, online retail/e-commerce is much more complex than Amazon. However, Amazon does it all. They sell their own products, serve as a marketplace for other sellers, and have their own supply chain. I think Amazon’s package volume is actually bigger than both UPS and FedEx now. They’re also more than 10% of UPS’s package volume. Here is part 1 and 2 of my research notes on the retail sector which covers both online shopping and consumer staples.

Online Retail Taking Market Share From Traditional Retail

I also don’t think a strong Black Friday/Prime Day means much for overall retail sales when you look at it every quarter because a lot of that is spending pulled forward to take advantage of the deals. So strong Black Friday sales may not translate to a strong 4Q since consumers are likely doing holiday shopping early.

However, the growth in e-commerce/online shopping can be considered a separate trend. Online retail sales have always outplaced total retail sales except for a few quarters post-pandemic when it was lapping extremely high year-over-year growth. Even now when we see some uncertainty in total retail sales, e-commerce continues to take market share.

Online Retail

Most of that is driven by non-store retailers or discretionary segments like clothing and general merchandise (in contrast to staples like food and healthcare). And that’s not just from online retailers like Amazon. It’s also from traditional retailers who are becoming more tech-savvy and integrating e-commerce alongside their brick-and-mortar operations in addition to utilizing omnichannel strategies like BOPIS (buy online pick up in-store).

Rosenbluth: I want to shout out broad consumer discretionary ETFs like the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Vanguard Consumer Discretionary ETF (VCR). They are different than the Consumer Staples Select Sector SPDR Fund (XLP) and Vanguard Consumer Staples ETF (VDC). Amazon is part of consumer discretionary, while Walmart is a consumer staple stock.

Online Retail Crosses Sectors

Islam: Walmart is a very large retailer, though. Even though they lean toward staples, they are about 15% e-commerce now which is about in line with the national average. The stock is found in many online shopping ETFs as well.

Many online shopping ETFs have both consumer discretionary and staples, as well as tech holdings and industrial. Transportation is an important part of the online retail chain.

Transportation companies benefit from the higher volume to the extent that they can handle the capacity. And that’s across all freight modes including passenger airlines which carry a lot of belly cargo.

Rosenbluth: I ticker dropped IBUY and ONLN earlier but there’s also the Global X E-commerce ETF (EBIZ). 70% of its assets are in consumer discretionary, but there’s 7% in industrials, as you noted.

Islam: There are also ETFs like the First Trust S-Network E-Commerce ETF (ISHP) — that one is about 40% communications, 27% discretionary, 15% tech, and 9% industrials. Online retail is really a multi-sector concept.

Rosenbluth: Good point! Many thematic ETFs are cross-sector.

Jane Edmondson, VettaFi head of thematic strategy: The other interesting thing we are seeing among online shoppers is increasing use of buy now/pay later, or “BNPL.” Adobe reported a 17% increase in the use of BNPL this holiday season over last year. And there was $940 million in BNPL on Cyber Monday alone!

What does this mean for the consumer? Is it a bad thing? I think it is actually more about swapping high-rate credit cards for the more favorable terms of BNPL. That’s just another attraction of shopping online — payment flexibility.

Travel Having a Strong Year

Rosenbluth: I’m jumping back in before this gets too smart for me about shopping — I’d rather sit on my couch and watch TV than shop! The SPDR S&P Retail ETF (XRT) was long the go-to ETF for people thinking about retail. And it has close to $500 million in assets. But this year XRT is up just 8% vs. 25% for IBUY.

Edmondson: The clicks are definitely beating the bricks among holiday shoppers! But the thing we are seeing in retail and across other sectors is the resumption of trends that were in place before the pandemic.

We are also seeing strong travel spend among consumers. I was on a flight yesterday for business, but it was packed to the gills with returning holiday passengers. Consumers are traveling, eating out, and generally seem to be enjoying life, despite higher costs.

While the U.S. Global Jets ETF (JETS) is not having a great year from a performance standpoint, the Defiance Hotel, Airline, and Cruise ETF (CRUZ), which is a broader-based play on the travel theme is having a solid year, up 20%.

It is interesting also that some Chinese online players are becoming popular in the U.S. Pinduoduo’s Temu has really shaken things up. That company is now a formidable competitor to Alibaba. And another popular Chinese fast-fashion retailer, Shein, is about to IPO in the U.S. They are playing to cost-conscious consumers’ desires for a bargain.

Rosenbluth: I was just looking at the Goldman Sachs Future Consumer Equity ETF (GBUY), an active ETF. It has about 60% in North American stocks but lots of international ones like LVMH and Mercado Libre.

Luxury Goods Vs. Cost-Conscious Shopping

Edmondson: It’s also interesting in this age of cost-conscious consumers we have seen the launch of several luxury-focused ETFs. The Tema Luxury ETF (LUX), Roundhill S&P Global Luxury ETF (LUXX), and KraneShares Global Luxury ETF (KLXY). So which consumer economy are we in? Fast fashion using BNPL or luxury goods?

Rosenbluth: I’m not sure I’m proactively living in either, Jane. But at Exchange I will be rotating between solid blue and solid white dress shirts with no tie.

Jen, I think I saw gas prices have been falling. That should have been good for spending and maybe sets up for more old-school holiday road trips.

Nash: Yes, gas prices have now fallen for 10 straight weeks to nearly their lowest level of the year. This is one of the areas where consumers are most attuned to prices, so I anticipate some of the future consumer sentiment surveys to start reflecting more positive attitudes about inflation.

With that said, the latest Michigan consumer sentiment survey did report that consumers have noticed a slowdown in prices across the board but that they remain cautious and worried that this could reverse soon. Todd, are there any gasoline/oil ETFs that this could impact?

Rosenbluth: There are no gas price ETFs, but there is the United States Oil Fund (USO) that is tied to the price of oil.

Islam: There’s also the United States Gasoline Fund (UGA).

Rosenbluth: I’m happy to be wrong, Roxanna!

EVs Losing Sales to Hybrids, Conventional Vehicles

Edmondson: The Tesla Cybertruck is about to debut, Todd. Maybe you can take your road trip in that?

There is a really interesting trend going on right now with EV sales. Hybrid vehicles (both gas- and EV-powered) have surpassed EV sales for the first time. Range anxiety is an issue of course on those long car trips, worrying about how and where to charge.

But the other thing we are seeing is that EVs still are much more expensive than their gas-powered and hybrid vehicle peers. I am sure that high interest rates are exacerbating this as well, making high-cost EVs even more expensive. I’m not sure of the price point for that Cybertruck. $70k?

Rosenbluth: I’m not buying a car for the holidays, no matter how happy the people on TV seem to be when one magically arrives in the driveway. I also live in an apartment building.

Playing the EV Space

Edmondson: There are a few ETF plays on EVs including the Amplify Lithium and Battery Technology ETF (BATT) which has exposure to the EV supply chain; the Kraneshares Electric Vehicle & Future of Mobility ETF (KARS) and the First Trust S-Network Future Vehicles and Technology ETF (CARZ).

Not to mention all the ways to play Tesla from single-stock ETFS to levered and inverse versions and even high-yield income versions! Innovator even has the Innovator Hedged Tesla Strategy (TSLH).

Sounds like there is no Tesla Cybertruck with a giant holiday bow for you, Todd.

Rosenbluth: That would surprise me in many ways.

Bell: But if gas prices are way down, will that hurt EV sales?

Edmondson: I think the longer-term trend remains toward EV adoption. But we need more EV charging infrastructure and prices to come down. Oil prices can fluctuate, but oil companies are not going away overnight. And energy companies are a great cash flow story. Many pay nice dividends, are buying back shares and there has been recent M&A activity.

For more news, information, and analysis, visit the Climate Insights Channel.

vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for ISHP, CARZ, and IBUY, for which it receives an index licensing fee. However, ISHP, CARZ, and IBUY are issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of IISHP, CARZ, and IBUY.