When the Halloween decorations go away, holiday shopping begins. Each year consumers continue to surprise us with enthusiastic spending despite inflationary pressure. This year seems no different. Third quarter saw strong discount days from retailers combined with higher forecasted online shopping. This momentum leads us into a strong fourth quarter and holiday season. So how do investors take advantage of the strong retail environment (particularly the growth in online shopping)? While consumer discretionary ETFs like the Consumer Discretionary Select Sector SPDR Fund (XLY) are often used as a proxy for consumer spending, the reach is much broader. It goes beyond discretionary spending. This note discusses several alternatives to XLY that investors can use to capture the strength in retail and online shopping.
Don’t Discount E-Commerce Growth
Before we look at the ETFs, let’s look more closely at the big picture. Retail sales were up 0.4% in September, boosted by a relatively strong job market and lower gas prices. Much of this strength came from e-commerce sales, which continue to grow at a faster pace than total retail sales. Online shopping has expanded to include many categories, now including groceries, food delivery, furniture, and home improvement goods — not just small goods with high replacement cycles like clothing and accessories.
Third quarter U.S. e-commerce data will be released on November 18, but early data show that 3Q data will continue to show strength. Nonstore retail sales (adjusted) were up 7% year-over-year in 3Q. Nonstore retail sales closely approximates e-commerce sales, and if I apply an adjustment factor to these results, then estimates show that e-commerce sales will be up around 6% year-over-year.
From another perspective, e-commerce sales are estimated to be 16% of total retail sales. This points to strong fundamentals for the holiday shopping season, particularly on big discount days like Black Friday. In the 3Q, Amazon (AMZN) held its annual Prime Day on July 16–17. Its second Prime Day — Prime Big Deal Days — was held in the 4Q on October 8–9 with record sales and number of items sold.
E-commerce ETFs Outperform Broader Sector ETFs
E-commerce ETFs have outperformed broader sector ETFs, including discretionary, staples, and technology sectors. Performance hasn’t necessarily been across the board in individual stocks but has been attributed to several high performers (discussed below). Despite outperformance, these ETFs have mostly seen net outflows YTD, as many investors have been more interested in other technology and industrial ETFs including artificial intelligence, semiconductor, and aerospace and defense themes. But with stronger retail sales and online shopping trends continuing into the fourth quarter, investors who want to capture that strength have several different options.
Growing Online Shopping Trends Have Led to Various Definitions of E-commerce
Retail and e-commerce ETFs are all very different from each other due to their definitions of e-commerce, which don’t fit a single sector story. While these are mostly consumer discretionary stocks, online shopping has been evolving over the years as the next generation of retail. Online marketplaces like Amazon and eBay (EBAY) have led the way, creating models imitated by large omnichannel retailers like Walmart (WMT) and Costco (COST), which not only include discretionary goods but also staples like groceries and healthcare.
Several smaller retailers specialize in these categories. Maplebear Inc (CART), which does business as Instacart, specializes in app-based grocery delivery. Its IPO in September 2023 had a rocky start, but the stock has been up over 94% YTD. Another telehealth care e-commerce stock, Hims & Hers Health (HIMS) has been up almost 132% YTD.
E-commerce doesn’t just deliver discretionary and staples goods — it also can deliver services. Online travel like Booking Holdings (BKNG) and Airbnb Inc (ABNB) are considered e-commerce stocks by many ETFs. And outside of retailers, technology and logistics companies are crucial for e-commerce operations. Companies like Paypal (PYPL) and United Parcel Service (UPS) are found in several of these ETFs.
Several ETFs Focus on E-Commerce and Retail Sales
- Amplify Online Retail ETF (IBUY): This ETF is the largest e-commerce ETF with around $170 million in assets. It holds companies in online retail, online travel, online marketplace, and omnichannel retail that have at least 70% of revenues or a minimum of $100 billion in annual retail sales in online transactions. For omnichannel retailers, online sales must be at least 10% of total annual retail sales and more than $2 billion in revenue. Equally-weighted, these stocks have a 10% aggregate cap on omnichannel. The ETF is mostly U.S. stocks — non U.S. domiciled stocks are capped at a 25% total weight. It holds several high-performing stocks, including Hims & Hers, Spotify Technology (SPOT), Maplebear, and Chewy (CHWY).
- ProShares Online Retail ETF (ONLN): Holdings include online retailers, e-commerce retailers, or internet retailers. Unlike IBUY, ONLN excludes online travel companies. Holdings are weighted based on market capitalization, with non-U.S. companies limited to a total of 25%. While its peers have smaller exposure to Amazon, ONLN has a 25% weight to this stock.
- Global X E-Commerce ETF (EBIZ): The ETF holds companies including online marketplaces, online retailers, and companies that provide technology that facilitates the development and enhancement of e-commerce platforms. Selected by natural language processing (NLP), these must have 50% of revenues derived from e-commerce activities. Holdings are market-cap weighted. This ETF currently has the largest allocation to non-U.S. stocks out of its peers. It has 27.5% of its weight in China.
- Franklin Disruptive Commerce ETF (BUYZ): Out of its peers, BUYZ is the only actively managed fund. It uses bottom-up research to select e-commerce companies. These include retailers, payment companies, logistics and delivery companies, software companies, and marketing companies. While holdings look somewhat similar to its indexed peers, several holdings stand out. These include payment processors like Mastercard (MA) and Visa (V), along online entertainment services like Netflix (NFLX) and Roblox (RBLX). Despite being actively managed, BUYZ is cheaper than its peers.
- First Trust S-Network E-Commerce ETF (ISHP): ISHP invests in the top 15 companies by market cap in four business segments: content navigation, online retail, online marketplace, and e-commerce infrastructure. These companies are then equal-weighted. This ETF holds some unique stocks not included by its peers, including internet stocks like Reddit Inc (RDDT) and Meta Platforms (META) in addition to delivery companies like FedEx Corp (FDX) and United Parcel Service.
- Outside of the traditional e-commerce ETFs, several retail ETFs share some similarities. The SPDR S&P Retail ETF (XRT) provides equal-weighted exposure to retailers including apparel, automotive, staples, drug, and food. The VanEck Retail ETF (RTH) includes the top 25 retail companies by free-float market capitalization.
- The Global X Millennial Consumer ETF (MILN) is another interesting ETF in an adjacent category. This ETF holds companies with significant exposure to one or more of eight spending categories. These include clothing, food, social, travel, education, financial services, housing, and health. The holdings are then ranked based on quantitative and qualitative factors in order of millennial focus for a total of 5–15 companies per category. These are market-cap weighted. Top holdings include many of the same e-commerce stocks in addition to companies like Starbucks (SBUX), Chipotle Mexican Grill (CMG), Lululemon Athletica (LULU).
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