A US-listed thematic ETF providing long exposure to e-commerce companies while shorting traditional bricks-and-mortar firms has soared in recent months as the Covid-19 pandemic forces Main Street shoppers online.
The ProShares Long Online/Short Stores ETF captures the long-term trend of consumers migrating their purchases online.
The ProShares Long Online/Short Stores ETF (CLIX US), which is listed on NYSE Arca, is up 44.4% year-to-date (as of market close on Friday 15 May 2020), compared to a -10.6% loss for the S&P 500 over the same period.
The fund obtains its exposure by combining a 100% long portfolio in the ProShares Online Retail ETF (ONLN US) with a 50% short position in traditional retailers through the ProShares Decline of the Retail Store ETF (EMTY US), both NYSE Arca.
CLIX was designed to tap into a long-term structural change in consumer habits that was well underway before the pandemic’s impact. According to the US Census Bureau, e-commerce sales grew at over four times the rate of overall retail sales in 2019.
Online revenues also accounted for just 11% of US retail sales last year, highlighting that the trend is still in its early stages.
Yet with lockdown orders causing non-essential businesses to close, Covid-19 has put enormous pressure on traditional retailers’ revenue streams. Luxury retailer Neiman Marcus, apparel seller J.Crew, and, most recently, department store J.C.Penney have all become permanent victims of the virus’s economic toll.
According to Simeon Hyman, Global Investment Strategist at ProShares, “Even when doors reopen, some companies may still be facing a cash squeeze as loans become due.”
The bleak outlook for bricks-and-mortar retailers has lifted the ProShares Decline of the Retail Store ETF by 19.9% YTD.
The fund takes a short position in the underlying Solactive-ProShares Bricks and Mortar Retail Store Index which consists of US-listed companies that derive at least 75% of their revenue from in-store retail operations. The index is equally weighted which helped to capture the broader picture of bricks-and-mortar downturn.
Many traditional retailers are due to report earnings this week, including Walmart, Home Depot, Lowe’s, and Target. While the reports are expected to be dismal, whether they surprise to the upside or downside of analyst expectations will likely influence the sector’s performance in the near-term.
Internet retailers, on the other hand, are enjoying their day in the sun as the global economic lockdown forced many traditional in-store customers to migrate their purchases online. According to Covid-19 Commerce Insight, online retail revenues in the US soared by 68% in April year-on-year.
This rapid change in the dynamic has led the ProShares Online Retail ETF to a 25.2% gain YTD. The fund tracks the ProShares Online Retail Index which consists of both US-listed stocks and ADRs of firms classified as online retailers, e-commerce retailers, or internet marketing retailers.
ProShares believes that not all online retailers are created equal with iconic companies (like Amazon and Alibaba) leading the charge in reshaping the retail world. The index weights its constituents by market capitalization subject to a single stock cap of 24%.
This methodology has resulted in the index offering the full 24% exposure to Amazon which is up 26.9% YTD, helping to drive performance. Amazon has also benefitted massively from a surge in demand for cloud services as millions of customers seek to move their work and entertainment practices online.
The strong performance of the retail disruption theme has led many investors to seek exposure to the ProShares Long Online/Short Stores ETF with the fund attracting $72m net inflows in April and a further $39m month-to-date in May. Combined with the ETF’s strong performance, the fund has grown its assets under management from $30m at the start of the year to over $175m.
Despite the spike in investor interest, the long-term impact of the pandemic on the retail disruption theme is unclear. Recent data from the US Census Bureau showed that total retail sales in April were down a record -16.4% compared to March, highlighting the risk that a protracted economic downturn may seriously dent consumer spending long-term.
However, Hyman is bullish, stating that the pandemic’s effects will lead to a lasting acceleration of what are already existing trends: “Temporary behavior changes have the potential to become permanent shifts in shopping habits,” he said.