Inverse retail ETF lifted as bricks-and-mortar stores crumble

Aug 21st, 2019 | By | Category: Equities

The ProShares Decline of the Retail Store ETF (EMTY US) is the top-performing US-listed equity ETF over the past month (as of 20 August 2019), posting a gain of 12.0%.

ProShares Online Retail ETF

The ProShares Decline of the Retail Store ETF (EMTY US) is the top-performing US-listed equity ETF over the past month (as of 20 August).

The fund, which provides inverse exposure to traditional bricks-and-mortar retailers in the US, has profited from ongoing problems in the sector including the effects of trade tariffs, slowing global growth, and the structural trend favouring online competitors.

The ETF tracks the inverse daily return of the Solactive-ProShares Bricks and Mortar Retail Store Index which includes firms from across the market-cap spectrum that generate at least 50% of their revenues from retail operations and 75% of their retail revenues from in-store sales.

The index is equally weighted and currently consists of 48 constituents including well-known names such as Barnes & Noble, Walmart, The Gap, Macy’s, Kroger, and Best Buy.

It comes with an expense ratio of 0.65%.

Headwinds for bricks and mortar

Retail firms are suffering rising costs due to tariffs upon goods imported from Chinese suppliers with stock prices tending to fall in tandem with announcements of new tariffs by the Trump administration.

Although recent data from Walmart shows that consumer sentiment in the US is still relatively strong compared to international markets, slowing global growth has begun to weigh on the retail sector with consumer discretionary stocks being traditionally vulnerable to consumers tightening their belts.

The Federal Reserve has demonstrated its willingness to lower rates to support growth with further cuts expected to have some positive effect on consumer sentiment and stock prices in general.

However, interest rate cuts cannot change the long-term structural problems facing traditional retailers, specifically the exodus of shoppers from Main / High Street to the convenience of online stores.

Latest figures from the US Commerce Department show that online sales growth (13.3% year-over-year as of the end of Q2) is currently more than four times faster than overall retail sales growth.

With online sales accounting for just 10% of total retail sales, the sector clearly has plenty of room to grow – analysts at UBS estimate online shopping will make up 25% of retail sales by 2026.

Tools to play the theme

The Amplify Online Retail ETF (IBUY US) is the largest to track this space with assets under management of $250 million. It tracks the EQM Online Retail Index which covers globally listed companies that generate at least 70% of their revenue from online and virtual retail sales. The fund’s expense ratio is 0.65%.

ProShares also offers a targeted online retail ETF – the ProShares Online Retail ETF (ONLN US) – which tracks a proprietary index that consists of both US and non-US companies listed on a US stock exchange. Its expense ratio is 0.58%.

Lastly, the Global X E-commerce ETF (EBIZ US) tracks the Solactive E-commerce Index which consists of developed and emerging market firms that operate E-commerce platforms; provide E-commerce software, analytics or services; or sell their goods and services primarily through online channels. Its expense ratio is 0.68%.

Each ETF has posted a loss over the past month, reflecting the hardships facing the entire retail sector, although none of the three have fallen nearly as much as the bricks-and-mortar segment. The Amplify, ProShares, and Global X funds are down 1.6%, 7.6%, and 3.8%, respectively.

Investors who wish to play both themes – i.e. the rise of online shopping and the fall of traditional retail stores – can do so through a long/short ETF from ProShares.

The ProShares Long Online/Short Stores ETF (CLIX US) combines a 100% long portfolio in the ProShares Online Retail ETF with a 50% short position in bricks-and-mortar retailers using the ProShares Decline of the Retail Store ETF. The fund’s expense ratio is 0.65% and it is down 2.0% over the past month.

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