With non-essential businesses across the U.S. being temporarily shuttered due to the COVID-19 pandemic, a slew of industries are feeling pain. Guess what qualifies as non-essential: retail.

And with stores and malls across the country shut down, there’s bad news building for brick-and-mortar retailers and probably some good news brewing for ETFs such as the ProShares Decline of the Retail Store ETF (NYSEArca: EMTY).

The Decline of the Retail Store ETF provides daily short exposure or -1x to the new Solactive-ProShares Bricks and Mortar Retail Store Index, which is comprised of traditional retailers and equally weights components. The fund holds companies including department stores, supermarkets and sellers of apparel, consumer electronics and home improvement items, such as retailers like Barnes & Noble, The Gap, Macy’s, Kroger and Best Buy, among others.

“Retail stores are closed en masse and mall traffic is down 90-100% across the U.S. after most announced two-week closures,” according to Jefferies retail analysts, reports Lawrence Strauss for Barron’s. “Even if stores open again in early April, expect mall traffic to remain highly subdued [as]evidenced by patterns seen in China.”

EMTY Excellence

Bolstering the case for EMTY is that 7,600 stores closed this year and by many accounts, that’s not nearly enough, indicating more closures could take place in 2020. Those closures could be hastened by a suddenly fragile economy and orders for people to stay inside due to the COVID-19 pandemic.

A growing concern among analysts covering brick-and-mortar retailers is that those companies are in imminent danger of needing to cut or suspend dividends.

With that in mind, perhaps it not surprising that EMTY surged 4% last Friday on a volume that was more than quadruple the daily average, bringing its weekly gain to almost 15%. EMTY is higher by 59.50% year-to-date and this isn’t a leveraged fund we’re talking about, but the aforementioned dividend negativity could manifest into an EMTY catalyst.

“The Jefferies analysts observe that closed stores at the malls will depress revenue from that channel to zero over that period,” reports Barron’s. “The online segments of these businesses, they add, will not experience enough of a lift (if any) to help offset store closures.’”

Bottom line: dividend cuts are a quick way for companies to conserve cash and some imperiled retailers may need to turn to that methodology to survive a trying environment.

For more on core investing strategies, please visit our Core ETF Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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