Retail ETFs: Do they deserve a spot in your portfolio?

The global retail industry is on a path of a sharp recovery following a deep tumble because of the coronavirus pandemic. With the worst in the rear-view mirror, the industry will resume its transformational changes it has been going through this third millennium by increased adoption of technology and digital tools. As investors hop back on the surging markets, should they shop for gains in the retail industry with retail ETFs?

Retail is one of the largest employing industries in the world

The retail industry is comprised of companies engaged in the direct sales of goods and services with the consumer. It is a highly segmented industry and includes:

• Motor vehicle and parts dealers
• Furniture and home furnishings stores
• Electronics and appliance stores
• Building material and garden equipment and supplies dealers
• Food and beverage stores
• Health and personal care stores
• Gasoline stations
• Clothing and clothing accessories stores
• Sporting goods, hobby, book
• General merchandise stores (e.g. department stores, supermarkets)
• Miscellaneous store retailers (e.g. florists, used merchandised stores, pet and pet supplies)
• Non-store retailers (e.g. ecommerce, vending machines)

The industry today is one of the largest employing industries in the world. In the U.S alone, the retail industry directly employs about 29 million people and supports more than 42 million jobs. Retail performance and consumer confidence are also leading economic indicators, giving economists and investors a glimpse into what the upcoming quarterly Gross Domestic Product (GDP) may look like. These indicators are also guiding the economists through future economic policies and investment decisions.

Retail industry overview and future outlook

By 2020, the global retail market reached a value of nearly $20.33 trillion, having increased at a compound annual growth rate (CAGR) of 2.4% since 2015. Moving forward, the global industry is expected to rebound at a CAGR of 7.7% from 2020 to reach $29.44 trillion in 2025 and $39.93 trillion in 2030, at a CAGR of 6.3%.

In 2020, Asia-Pacific (APAC) was the largest region in the global retail market, accounting for 34.7% of the total in 2020. North America came in second and Europe third. In the next 5 years, South America the Middle east will be the hottest markets growing at 12.4% and 10.4% respectively while Eastern Europe and Africa will grow at smaller pace at roughly 8%. (Data from Research and markets)

Retail industry catalysts for growth

Disregarding any future pandemics, World War III or other black swan events, the retail industry growth will be fuelled by several factors:

• Population growth: 2 billion consuming people will be added by 2050.
• Economic growth:  wealth increase in emerging markets will spur spending.
• Urban growth: increased population density in urban areas will drive retail expansion and growth.
• Foreign direct investment (FDI): developed market companies will increase spending in the retail industry in emerging and developing markets, to cater for the rise in population and improved financial capacity.
• Financing options: financing means are easily accessible today, compared to decades ago. With more access to capital, retail investments will increase, especially in emerging economies.
• Technology and Digital Acceleration: ecommerce, digital marketing, artificial intelligence, innovative payment solutions and increased virtual customer engagement will attract more spending from customers.

Investing in retail with retail ETFs

The retail industry is very diverse and includes several Fortune 500 companies like Walmart, Amazon, Alibaba, Costco, Kroger, Ikea, Carrefour, Nike and JD.com. With thousands of other public companies out there, choosing a winner is not easy task.

The idea of retail ETFs is to give investors a broad exposure to the retail industry and subindustries. This allows for diversification of an investor's portfolio within the sector as well as ease of management when compared to owning individual stocks. Trackinsight data reveals 9 ETFs with more than $2.7 billion in assets under management. Below is small list of top 5 largest ETFs and their ranking in terms of 2021 performance.

Top 5 largest retail ETFs by AuM:

1. Amplify Online Retail ETF: $910M
2. ProShares Online Retail ETF: $818M
3. SPDR S&P Retail ETF: $771M
4. VanEck Vectors Retail ETF: $212M
5. iShares STOXX Europe 600 Retail UCITS ETF: €22M

2021 retail ETF performance ranking:

1. SPDR S&P Retail ETF: +40.14%
2. VanEck Vectors Retail ETF: +10.67%
3. iShares STOXX Europe 600 Retail UCITS ETF: +7.75%
4. Amplify Online Retail ETF: -5.22%
5. ProShares Online Retail ETF: -14.99%

Amplify Online Retail ETF (IBUY)

Amplify Online Retail ETF (IBUY) is the largest retail ETF with $912 million in assets. It invests solely in companies that derive 70% of their revenues from online sales by tracking the EQM Online Retail Index. The United States attracts more than 75% of the fund's exposure, with China at second with a modest 6%.

In terms of holdings, IBUY is very diverse and has 71 holdings, including DoorDash (2.79%), Revolve Group (2.75%), Shutterstock (2.55%), Netflix (2.54%) and Just Eat (2.47%). The holdings are distributed between three main industries, Traditional Retail (52.4%), Marketplace (39.3%) and Travel (8.3%).

Despite IBUY woes this year, the fund managed to keep early investors happy. Since its inception on April 20th, 2016 the fund posted a cumulative +341% returns and around 31% on an annualized basis.

The fund trades on NYSE Arca and charges 0.65% in annual fees.

SPDR S&P Retail ETF (XRT) 

SPDR S&P Retail ETF (XRT) is the second largest Retail ETF in the market with around $700 million in assets. Unlike its peer IBUY, XRT invests in pure U.S. retail companies but has a wider exposure to retail subindustries, including internet & direct marketing retail (20.07%), apparel retail (19.92%), automotive retail (18.58%), specialty store (17.04%), food retail (5.83%) and others. Thus, it offers access to aggressive, cyclical and defensive industries.

XRT has 107 holdings, including Group 1 Automotive Inc. (1.24%), Asbury Automotive Group Inc. (1.22%), Designer Brands Inc. (1.21%), Penske Automotive Group Inc. (1.19%) and Signet Jewelers Limited (1.17%).

Among its major peers, XRT has been the best performer year-to-date with +41% in returns and has kept early investors happy, posting +470% in gains since its inception on June 19th, 2006.

For interested investors, the SPDR S&P Retail ETF trades on the NYSE Arca and charges 0.35% in annual fees.

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