Amazon (NASDAQ:AMZN) Prime Day, the marquee U.S. retail event not linked to holiday shopping, wrapped up Tuesday and that's actually a good segue to revisiting the e-commerce/online retail investment thesis.
Sure, allocating to a dedicated online retail exchange traded fund is more of a satellite concept, but it's valid one nonetheless. Additionally, this is an area where advisors can add value for clients. Advisors can keep clients on track in this space – a worthy endeavor at a time when growth stocks are scuffling and Amazon – the name most investors associate with online retail – is up less than 8% year-to-date.
Advisors shouldn't scoff at the notion of discussing online retail with clients. Clients are already familiar with Amazon and the data confirm many if not all clients are already devoted online shoppers. Speaking of data, 2022 is forecast to be the first year when American consumers spend north of $1 trillion online, according to Adobe Analytics.
Not All About the Pandemic
One of the investment relics of the coronavirus pandemic will be e-commerce growth, much of it rooted in the notion that folks didn't want to go out and shop for fear of contracting COVID-19 and that many non-essential retailers spent significant portions of 2020 shuttered. However, the apex of e-commerce market share in 2020 was 16%. Solid, but not as impressive as some would guess.
Fortunately, there's room for growth, even if online retail returns to pre-pandemic trends.
“If we simply returned to something like the pre-pandemic growth rate, e-commerce penetration would trend around 20% in five years,” notes ProShares Global Chief Investment Strategist Simeon Hyman. “However, many forecasts are predicting the acceleration of the trendline to continue post-pandemic. In its October 2020 report, eMarketer expected e-commerce penetration to get close to 20% in just three years’ time. Keep in mind that a 20% penetration would achieve roughly a 50% increase in total e-commerce sales. There’s still lots of growth to come.”
There's another avenue in which advisors can add value for clients craving online retail exposure: Delineating between companies in this space that are “born this way” and brick-and-mortar retailers with online operations. Amazon is a “born this way” company while Walmart and Target are examples of traditional retailers with internet exposure. For clients, the distinction is meaningful.
“Other bricks-and-mortar retailers like Target and Macy’s have fared similarly to Walmart,” adds Hyman. “Traditional players can be burdened with legacy cost structures and too many physical locations, among other challenges. Born online retailers—not just Amazon, but companies such as Chewy, Etsy and Wayfair—may have sustainable advantages for quite some time.”
Bank on This Benchmark
In the simplest of terms, online retail investing is like any other investment concept: There's a right and a wrong way of executing it. One of the right ways is with the ProShares Online Retail Index, which is home to Amazon, Chewy, Etsy and more “born this way” companies.
Proving the aforementioned distinction matters, the ProShares Online Retail Index is higher by 54.15% over the past year – an impressive run to say the least.
“Looking at which companies were responsible for the 100%+ return of the ProShares Online Retail index over the past three years, Amazon accounted for about a quarter. In e-commerce, economies of scale matter,” says Hyman. “Amazon’s average weight in the index during the three-year time period (24.11%), which was in line with its contribution to the index’s return, well matches its size and impact. But there were many other impactful e-commerce companies.”
With that benchmark, investors get an Amazon proxy, exposure to up-and-coming e-commerce names and none of the risks associated with lumbering old guard retailers.
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