To gain entry into the underling EQM Online Retail Index on which this fund is based, a firm must derive at least 70 percent of its sales online. The index rebalances twice a year, and aims to bring up to 25 percent exposure to e-tailers based outside the U.S. as well.
To be sure, investors should expect a high degree of volatility due to high levels of portfolio concentration in small cap e-tailers such as Stamps.com and PetMed Express. And the average holdings trades for nearly 13 times projected cash flow, far higher than the five times cash flow multiple sported by the S&P SPDR retail ETF. Still, the fund’s 28 percent one-year return helps epitomize the ongoing migration to online shopping.
As noted, the S&P SPDR fund is still the most popular with investors in terms of assets under management. But the basket approach with this fund avoids the selectivity that will be needed in the years ahead. “Within retail, there will be a wide spectrum of returns,” says D.A. Davidson’s Bolton Wesier, adding that strip-mall traffic, for example, is showing more stable sales these days when compared to large malls.
Indeed, there are still a number of well-positioned retailers that provide the right exposure at the right price. Target, for example, recently reported solid quarterly results, and the firm’s “turnaround initiatives are gaining traction despite a challenging retail environment,” note analysts at Merrill Lynch. They see nearly 30 percent upside for shares of this retailer.
In effect, this may be an example where individual stock selection is the better path than ETFs. If you do want to gain exposure to broader consumer spending, the VanEck Vectors Retail ETF and the Amplify Online Retail ETF may be a better choice, thanks to their exposure to the dynamic e-commerce sector.