FMD Capital Management

New Online Retail ETF Offers Unique Growth Focus

Written by David Fabian, April 29th, 2016

The traditional retail sector has been dominated by brick and mortar business models that have continued to lose market share to online competitors.  Consumers simply don’t shop the way they used to, with a rising trend of mobile transactions and brand loyalty to dominating names such as (AMZN). 

When looking through the list of diversified indexes attached to the retail theme, it becomes clear that conventional wisdom has been to cast a wide net over these stocks.   Established funds like the SPDR S&P Retail ETF (XRT) are dominated by a broad range of apparel stocks, specialty stores, and consumer staples companies.  XRT owns an equal weighted basket of 100 publicly traded stocks in the retail industry and is the largest such ETF with $680 million in total assets.

Another variant of this strategy is the MarketVectors Retail ETF (RTH), which sticks with just the 25 largest retail stocks in a market-cap weighted index methodology.  As a result, AMZN sticks out as the top holding with over 14% of the portfolio, alongside core staples such as Wal-Mart Store Inc (WMT).

A New Entrant

Fortunately, a new ETF issuer has arrived on the scene to shake things up a bit.  The Amplify Online Retail ETF (IBUY) recently debuted as a unique alternative to these established funds.  The focus of this passively managed ETF is to select a group of 44 stocks that derive at least 70% of their revenue from online sales.  Furthermore, IBUY is arranged using modified equal-weighted criteria to allow smaller companies to have a meaningful impact on overall performance.

The underlying index was developed by EQM Indexes LLC and includes a combination of consumer discretionary stocks, travel companies, and marketplace providers.  It also encompasses a relatively balanced mix of small, mid, and large-cap stocks.  Companies such as AMZN sit side-by-side with Inc (NFLX), Expedia Inc (EXPE), and Inc (STMP).

When I look at the holdings of this ETF, I immediately see cross sections with comparable attributes to XRT, RTH, and even the First Trust Dow Jones Internet Fund (FDN).  Furthermore, 25% of the IBUY portfolio is located outside of the United States.  This global slant and online focus further differentiates IBUY from its competition in the retail ETF space.

IBUY was developed and launched by Christian Magoon, who successfully brought to market the YieldShares High Income ETF (YYY).  The new AMPLIFY brand will focus on delivering differentiated strategies in both growth and income categories to give ETF investors greater choices among underdeveloped sectors.

The Bottom Line

For growth oriented investors, this new ETF may offer an opportunity to access a basket of stocks in a niche vertical of the retail space.  However, its smaller number of holdings and focused properties mean that it is most likely suitable as a tactical position.  This fund will likely experience heightened volatility versus the broader market and may be influenced by cyclical factors that are prevalent in the retail industry.

Investors considering this ETF should also note its 0.65% expense ratio is on the high side when compared to the 0.35% management fee of XRT and RTH.  Of course, that differential can be easily overlooked if the trend of online sales continues to drive strong results in these stocks.


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