by: Karn Brij
Despite the recent jump in industrials & financial stocks since President-elect Trump’s victory on Nov. 8, the technology sector seems to have missed out.
Coming out strong so far in 2017, technology is actually the largest sector in the U.S. markets and the most heavily weighted sector in the S&P. This gargantuan sector includes software, hardware & semiconductor manufacturers and service providers in the information technology, e-commerce & data management fields, just to name a few.
Within the myriad subsectors of the labyrinthine tech industry, e-commerce stocks are where the real growth will be this year. The e-commerce industry consists of companies which derive most of their earnings by facilitating the exchange of goods and services online.
The industry is disrupting the entire retail model, with online retailers handily beating their brick & mortar competitors. The department store model is unpopular with millennial consumers who eschew shopping malls and prefer the ease and convenience offered by online purchasing.
The data for traditional retailers is not promising either. In-store analytics, tracker RetailNext reported that mall traffic sank more than 12% in November and December 2016, with mall sales falling nearly 10% in the same period.
A look at the share price performance of traditional retail giants like Macy’s, JCPenny and Sears, compared to the S&P 500 over the last five years, shows a worrying trend in these kinds of companies. Macy’s & Sears have both recently announced in excess of 100 store closings and mass layoffs.
Online retailers, on the other hand, have flourished with internet business companies such Amazon, Overstock & PetMed Express growing more over 100% in the same timeframe. According to Whisbi, a retail intelligence firm which specializes in e-commerce, online retailers will see a lot of growth in groceries, apparel, home improvement, furniture and consumer electronics during the next few years. This growth will come at the expense of traditional retailers.
Another strong driver for growth in e-commerce is the rise of populous emerging markets. As the access to internet improves in rapidly developing countries like India, China, Indonesia, etc., e-commerce will penetrate further and begin to take larger bites of traditional retailers’ profits. In fact, larger Chinese e-commerce companies like Alibaba (BABA) and NetEase (NTES) have successfully filed ADRs in the United States already.
As the U.S. economy continues to grow in 2017 and usher in a new bull market, so will consumer confidence, which in December was at its highest level since August 2001, according to Bloomberg. The United Parcel Service (UPS) has indicated that it expects record e-commerce sales this holiday season, based on the number of deliveries it performed in Q4 of last year, according to MarketWatch. With e-commerce still at a relatively low 8.5% of all retail sales, this sector has a lot of room to grow.
Those interested in making an e-commerce play should consider doing so through an exchange-traded fund (ETF). ETFs have teams of analysts and fund managers who spend hours researching the numerous players in this fast-moving and volatile industry. Good ETFs give investors a concentrated mix of stocks that operate in the same industry while offering the benefits of diversification.
Amplify Online Retail ETF (IBUY) provides an easy way for investors to own a basket of companies which generate more than 70% of their revenue from online and virtual retail sales. The fund, which was launched in April 2016, offers diversification across small/ medium/large companies, geographies and business focus. The fund’s top 10 holdings as of December 31, 2016, are:
Over the last six months, IBUY has outperformed both the S&P 500 and the S&P Retail SPDR (XRT). XRT, which is heavily tilted towards traditional retailers, broadly underperformed the market, compared with IBUY’s market beating 11.5% return (which helps justify its somewhat high 0.65% expense ratio).
Consulting firm AT Kearny estimated that online retail will grow 117% by 2018. The explosive growth of the e-commerce industry is not simply a cultural whim or a fad, it is a long-term trend and the data seems to prove it. Those seeking a longer-term investment with the stomach for volatility should definitely consider this relatively new ETF. If the last six months are any indication, it is poised to have a great 2017.