When considering exposure to consumer sectors and retail-related exchange traded funds, investors should keep in mind the soaring growth of e-commerce and the decline of traditional retail stores.
However, a number of secular pressures remain. For instance, mall traffic continues to decline, consumers have shifted over to online shopping and deflationary pressures on average unit retail or net sales after markdowns.
The secular pressures also reveal the negatives of an over-saturated retail industry in the U.S. Tunick argued that the U.S. is “over-retailed” as the country boasts the largest retail square foot per capita in the world with $14,614 retail sales per capita. The U.S. may also suffer from too much footage allocated towards apparel, namely large department stores.
Consequently, the shifts in spending habits and large square footage allocated to brick-and-mortar shops have weighed on the traditional retail segment. Simeon Hyman, Head of Investment Strategy for ProShares, revealed that retail companies have systematically underperformed the broader equity market. Over the past year, brick-and-mortar retail taken from the GICS Retail Industry groups have declined 3.44% over the past year and only returned an average 0.52% annually over the past five years. In contrast, the Russell 3000 returned 24.0% over the past year and averaged 15.11% in the past five years.
“Traditional physical retailer stocks have systematically underperformed the equity market for the past one-, three- and 5 year periods,” Hyman said. “In fact, you have to go back five years to even find positive returns – barely.”
While retailers just experienced one of their best holiday sales periods in years, strong overall sales growth of over 5% was still dwarfed by a 20% jump in online sales, reflecting the ongoing shift in consumer habits to e-commerce. Looking ahead, retail disruption and performance challenges for traditional bricks-and-mortar retailers are likely to continue.
“For bricks-and-mortar, many analysts see a bleak forecast,” Hyman said. “As popular as online shopping may seem, only 10% of global purchases are currently conducted online, which leaves substantial room for growth that will further displace retail stores. Even Amazon, massive juggernaut that it seems, still has less than 1/3 the total sales of Walmart. And even for retailers that are able to find new business models, it’s likely future success won’t measure up to the past.”
Brick-and-mortar shops, though, aren’t going to take this sitting down. Retailers have tried to adopt new business models like omnichannel sales, or integrate retail distribution mode where online and brick-and-mortar presences are integrated, such as ordering online and picking up in a store. Retailers are also using a type of showrooming strategy where they open small footprint stores with little to no inventory and sales are then generated in the phyiscal location but fulfilled online.
“It remains to be seen which traditional retailers will successfully adapt to stave off the loss of market share to Amazon and other e-commerce retailers and still remain profitable,” Hyman said.
As investors consider the shifting landscape in the consumer sector, look to something like the ProShares Decline of the Retail Store ETF (NYSEArca: EMTY) and ProShares Long Online/Short Stores ETF (NYSE Arca: CLIX).
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.
Meanwhile, the Long Online/Short Stores ETF is a type of long-short strategy and the first ETF to track the potential growth of online companies while benefiting from the decline of bricks and mortar retailers.
Financial advisors who are interested in learning more about the retail segment can watch the webcast here on demand.