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“One-click wonders” seem to be leading the way for retail.
The Amplify Online Retail ETF — the first and largest exchange-traded fund focused primarily on e-commerce — has rallied nearly 30% this year, far outpacing the SPDR S&P Retail ETF’s 12% gain and the S&P 500’s 17% climb.
The disparity might be related to their respective makeups: While the S&P fund, known more commonly by its ticker, XRT, counts brick-and-mortar names like Five Below among its top holdings, Amplify’s ETF, ticker IBUY, invests solely in stocks that meet its requirements — at least 70% or $100 billion of the underlying company’s revenue must come from online sales.
That includes popular e-commerce stocks like Wayfair and Etsy. And, if you ask Amplify CEO Christian Magoon why his fund might be winning out over what some may consider the industry standard, his answer is simple.
“Clicks are winning over bricks,” he told CNBC’s “ETF Edge” segment on Monday. “We just saw the U.S. retail sales report last month. … Online sales grew 11.6% year over year. Department store sales were down 3.6% year over year. “
Add that to the longer-term divergence between IBUY, which is up more than 100% in the last three years, and the XRT, which has gained less than 4% over the period. Magoon says that, with a few exceptions, this trend is here to stay.
“We think online retail is the theme to invest in. It’s a global trend,” he said. “We think brick and mortar might be a trade in some cases. There’s definitely some sentiment that has popped in some cases, but also dropped majority of the time over the last three years. So we think that’s a trade versus an investment for the online retail space.”
Tim Seymour, founder and chief investment officer of Seymour Asset Management, has another explanation for the XRT’s relative underperformance.
“As a guy that historically has run a long-short equity portfolio, a lot of people use the XRT as some type of a hedge or a measure of cyclicality in the global economy,” Seymour said in the segment. “I think a lot of this is a call on where we believe the economy is, and let’s face it: Despite the fact that the market’s having a great run here and we’re at all-time highs, that’s more of a function of people actually fearing, I think, this tick higher.”
So when it comes to the XRT, whose top-performing holdings include online-only car retailer Carvana and Western-themed apparel seller Boot Barn, Seymour’s advice is to “know what you own.”
“With the XRT, this tends to be a high correlation to growth,” he said. “As an [emerging markets] guy historically, I would short the XRT against it because it’s very highly correlated with emerging markets.”
As for Magoon, when he says “online retail,” he’s not just talking about the all-powerful Amazon. In fact, his fund downplays the online giant’s influence over the group, choosing to weight its holdings equally rather than by market capitalization.
“We’ve seen even this year that Amazon isn’t even a top 10 performer in the online retail space,” Magoon said. “It hasn’t outperformed companies like Chegg or Etsy or Wayfair. Amazon isn’t always the No. 1 performer. Why? Because it has a really diversified business, whether it’s AWS Cloud or some of the spending they’re doing to build out infrastructure for deliveries. It’s a unique stock and it certainly has had an unbelievable return, but it also has a lot of risks and volatility associated with it that aren’t specific to online retail. “
So, instead of simply allowing Amazon to steer the ship, Magoon lets the rest of the digital commerce space take the lead, partly in hopes that investors will find out about stocks they didn’t previously know.
That kind of strategy “allows you to have exposure to Amazon, but not to be overly weighted, and discover companies like Carvana, which is a top holding in IBUY that many investors aren’t that familiar with that’s gained over 90% over the last year,” he said. “Discovering new online retail companies is what IBUY is all about, and it’s been able to deliver significant alpha both against the traditional brick and mortar [and], even this year, against a company like Amazon.”
