By Todd Rosenbluth, CFRA

Key Takeaways

• ProShares Online Retail ETF (ONLN) earns a top CFRA rating for the ETF’s record and appealing holdings.
• While the fund’s top-10 holdings comprise more than 70% of assets, CFRA finds Amazon.com (AMZN), eBay (EBAY), JD.com (JD) and Wayfair (W) to be attractively valued and poised to benefit from growing comfort with online shopping.
• CFRA finds ONLN as generating a strong record and is well positioned for future outperformance of the global equity category.

Fundamental Context

The CFRA Focus Mutual Fund for November is five-star rated ProShares Online Retail ETF (ONLN).

With changes in consumer confidence, shifting spending patterns, and new shopping habits spurred by the ongoing global pandemic and increased focus on e-commerce over in-store shopping, retailers have much to navigate as they look to close the year on a high note during this traditionally peak selling period. According to CFRA Equity Analyst Camilla Yanushevsky, pre-Covid-19, many U.S. consumers did not trust online shopping. While some categories, such as online grocery, lagged more than others, the physical store provided consumers with a sense of reliability across the board. Now e-commerce is providing consumers a sense of comfort they have never indulged in before. What is more commented Yanushevsky, pre-Covid-19, consumers would either buy online or pick up in-store but doing both was mostly unheard of. Covid-19 has made both relevant and prompted retailers to scramble to invest in technology and process enhancements to add and expand fulfillment options. The $705 million ONLN has and is likely to continue to benefit from these trends.

To rate equity ETFs, CFRA combines a review of the fund’s record with an assessment on the reward and risk potential of the portfolio. ONLN has handily outperformed the MSCI ACWI Index and the S&P Global Consumer Discretionary Index S&P 500 Index in the past year. ONLN’s gained 89% in the one-year period ended October 30, 2020, ahead of the 5% and 10% gains for the respective global indexes. ONLN launched in July 2018 limiting a longer-term analysis of its record. However, CFRA thinks investors ought to also look forward with ETFs since the securities inside will help drive future performance success.

Amazon’s Dominance in Retail Demonstrated in ONLN. AMZN is the 800-pound gorilla in the retail space and the stock represented 24% of ONLN assets at the end of October. CFRA Equity Analyst Tuna Amobi reiterated his Buy recommendation on AMZN shares last week. He views AMZN as a prime beneficiary of accelerated secular shifts in global e-commerce and cloud computing at Amazon Web Services (AWS), as Covid-19 demand tailwinds drive further ramp-up of free cash flow, despite ratcheted delivery/fulfillment and Covid-19 costs. AMZN net sales rose 37%, mostly on e-commerce growth and retail subscriptions, while operating income was stronger than expected due to AWS margin expansion. Amobi sees continued momentum through the crucial holiday selling season and maintains that the stock is still attractively valued.

CFRA also has Buy recommendations on eBay and Wayfair, two other top-10 positions for ONLN. Amobi believes W’s home-related product categories are in high demand from a strong active customer base.

Alibaba Group (BABA 305 ***) is ONLN’s other double-digit position. CFRA Equity Analyst John Freeman thinks the company’s competitive advantages—its scale, strong brand, and network effects—position BABA to fully benefit from the e-commerce and cloud trends and generate compounded annualized revenue growth of 27% over the next three years. However, he has a Hold recommendation on BABA due to China-specific risks and the company’s high and growing debt level.

While CFRA thinks the stock is fairly valued, BABA’s relatively strong earnings potential, based on our forensic accounting analysis, contributes favorably to strong risk considerations employed in CFRA’s five-star rating of ONLN. Other international holdings for the ETF include JD.com and MercadoLibre (MELI).

Demand is high for online retail ETFs. ONLN, which charges a 0.58% expense ratio, has incurred approximately $630 million of net inflows in 2020, including $420 million of net ETF flows in October alone. The Just over $700 million ETF’s trading volume has increased to an average of 350,000 shares. We expect during the holiday shopping season, investor interest will appropriately increase. Based on CFRA’s forward-looking ETF ratings approach, incorporating risk, reward, and cost analytics, we think five-star rated ONLN will outperform its global equity ETF category over the next nine months.

Conclusion

We think ONLN provides investors with exposure to growing demand for online shopping, with sizable positions in appealing positions. We think the ETF is positioned well for the future.

Join CFRA’s equity research team on November 18 for a discussion on the 2020 holiday outlook. https://go.cfraresearch.com/holiday-outlook-cfra-2020

Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.