The rise of this e-commerce fund may be the latest sign of ‘Amazon effect’ on traditional retailers

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Bloomberg

Sites like Grubhub reflect how much online shopping has been gaining ground

As the bad news keeps mounting for the retail industry, a little-noticed measure adds fresh evidence of an exodus away from bricks-and-mortar stores.

In October for the first time, assets in the biggest online retail exchange-traded fund topped those of the largest broad retail ETF. That fund, the SPDR S&P Retail ETF XRT, -0.73%, is made up of companies that do most of their business in the physical, not online, world. As of Thursday, XRT, referring to its ticker symbol, had $236 million in assets, compared with $249 million in, IBUY, the e-commerce-focused fund, the Amplify Online Retail ETF IBUY, -0.63%.

“Online shopping has been gaining ground compared to shopping in stores,” said Todd Rosenbluth, head of ETF and mutual-fund research for CFRA, “and these ETFs reflect that.”

The crossover in assets came just before a holiday season that shaped up to be fairly painful for stores. Shares of Macy’s Inc. M, -0.28% have been up strongly this week because the company reported losses that weren’t as bad as analysts had feared. Victoria’s Secret parent L Brands Inc. LB, +2.85% also reported a big holiday-season loss. Shares of Kohl’s Corp. KSS, +1.26% and J.C. Penney Co. JCP, -2.34% are down sharply this year because of fears about their future.

To be sure, both ETFs are relatively small. And the story is a bit more complicated than investors pulling money from bricks-and-mortar while betting on online retailers: while XRT has seen outflows, IBUY’s funds have been relatively stable, Rosenbluth said.

What’s more, some stocks don’t fit cleanly into one category versus the other, as shown in the grid below.

SPDR S&P Retail ETF Amplify Online Retail ETF
Company name and ticker Fund weight Company name and ticker Fund weight
Rite Aid Corp, RAD, -3.23%   2.20% Grubhub Inc. GRUB, -7.02%   3.70%
Grubhub Inc. GRUB, -7.02%   1.60% Lands’ End Inc. LE, -1.76%   3.50%
Michaels Cos. Inc. MIK, -4.96%   1.60% Peloton Interactive Inc. PTON, -0.83%   3.20%
Children’s Place Inc. PLCE, +1.00%   1.50% Uber Technologies Inc. UBER, +1.55%   3.10%
Macy’s Inc. M, -0.28%   1.50% IAC/Interactive Corp.  IAC, +0.86%   3.00%
Guess? Inc. GES, +0.42%   1.40% Chewy Inc. CHWY, -1.05%   3.00%
Designer Brands Inc. DBI, -1.35%   1.40% Netflix Inc. NFLX, -1.12%   2.90%
Nordstrom Inc. JWN, -1.09%   1.40% Chegg Inc. CHGG, -0.15%   2.90%
Source: fund website Source: fund website

Also worth noting is the way investors use ETFs — and express their views on the future of businesses like Macy’s and Amazon.com Inc. AMZN, -0.38%  — in more indirect ways.

For example, XRT is “among the most, if not the most, heavily shorted ETF out there,” Rosenbluth said. Short interest — bets that the security will decline in value —rose at the end of 2019, the most recent data available from FactSet, and was most recently about 26.5 million shares. By one measure, known as days to cover, it would take nearly nine sessions for those bets to be covered. A so-called short seller must return the shares, that he or she has borrowed as a part of a short bet, when the price moves dramatically higher.

By comparison, 27.5 million shares of Tesla Inc. TSLA, -1.25%  are held short, but it would take roughly half the number of days, 4.4, for those short positions to be covered.

That means investors are using a basket of stocks that represent the traditional bricks-and-mortar industry to bet on lower prices in companies in the retail sector, even though there is no shortage of ETFs that offer a direct way to invest that thesis. The ProShares Decline of the Retail Store EMTY, +1.24% is just one example. The fund offers short exposure to shares of physical retailers as measured by an index of such companies.

Read: Double jeopardy for retailers: the online menace and recession

But despite being open for two years, EMTY has attracted only about $13 million, according to the fund’s website. For the type of sophisticated investor who wants to make a bet against retail stores, “trading volume matters more,” Rosenbluth said. XRT trades 3.2 million shares a day, based on a rolling 30-day period.

What’s more, as MarketWatch has reported, shares of Amazon are laden throughout many consumer-discretionary ETFs, making up nearly a quarter of some such funds and reflecting the company’s status as not just another shop but a powerful force that is reshaping trends around shopping, entertainment, services, logistics, and more. The Seattle-based company’s influence on trends an, particularly, its impact on traditional retailers has sometimes been referred to as the “Amazon effect.

XRT has been around since 2006, while IBUY launched in 2016. Over the past 12 months, XRT has returned 3.1%, according to FactSet, while IBUY gained 20.1%.

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