Online Retail Market Commentary
Online retail continues to be the fastest growing segment of retail commerce in the United States. According to the U.S. Census Bureau, ecommerce sales grew on average by 15.6% through the 3rd quarter of 2018, with e-commerce now comprising 9.8% of total retail sales. 2018’s holiday e-commerce sales hit a record level of $126 billion, up from $108.2 billion in 2017. Mobile commerce continues to rise in significance, with smartphones driving more than half the traffic and 31% of sales, up 25% and 34% annually per Adobe Analytics.
While the environment for online retail stocks remained positive in 2018, macro market conditions in the third quarter took its toll on the year’s investment performance. Year to date through September 2018 the EQM Online Retail index, a broad based index of online retail stocks, appreciated 27.7%, but in the fourth quarter the index declined 22.5%, ending down 1.0% for the year. The fourth quarter was a perfect storm for online retail stocks as both technology and retail names sold off during the period due to concerns about a global economic slowdown and the financial impact of tariffs on retailers.
Despite the fourth quarter market-related pullback, the market segment had many positive contributors for the year. Among the top-performing names in the index for the year were the leading online seller of handmade or vintage items Etsy, which was up 133%. Online used car retailer Carvana was also a strong performer, advancing 71%. Other top names were online travel stock Trip Advisor, up 57%, online services provider IAC/Interactive Corp, up 49.7%, and British online grocer Ocado, which advanced 41.2% in 2018 thanks in part to a licensing agreement with U.S. grocery chain Kroger.
Market conditions have rebounded strongly in the first quarter of 2019, with the index up more than 11% through the end of January. As earnings season has kicked off, online retailers are posting strong results tied to the record holiday season. It appears likely that tariff pressures will abate as the U.S. and China finalize a trade deal in 2019. With employment strong, driving consumer confidence and spending, the fundamental outlook for retail in the coming year, and in particular its faster growing segment, online retail, looks robust.
In February 2019, The National Retail Federation (NRF) issued its 2019 retail sales predictions. The NRF expects overall retail sales to grow 3.8% - 4.4% for the year with online retail sales growing in the U.S. by 10-12%. Going forward, we believe the underlying increase of online purchases supports the thesis for online retail-focused companies as an attractive growth stock allocation for investors.
Click here for a list of the top 10 holdings for IBUY (the ETF that tracks the EQM Online Retail Index)
The EQM Online Retail Index seeks to measure the performance of global equity securities of publicly traded companies with significant revenue from the online retail business. The Index methodology is designed to result in a portfolio that has the potential for capital appreciation. The Adviser and Sub-Adviser believe that companies with significant online retail revenues may be best positioned to take advantage of growth in online retail sales and shoppers versus companies with less significant online retail revenues. Eligible constituents derive at least 70% of revenues from online and/or virtual business transactions (as opposed to brick and mortar and/or in-store transactions) in one of three online retail business segments: traditional online retail; online travel; and online marketplace. An investment cannot be made directly in an index.
WHY ETF TRANSPARENCY MATTERS NOW
An important ETF characteristic during market volatility
By Christian Magoon
Whenever increased market uncertainty occurs, ETF investors should utilize a feature most ETFs offer: portfolio transparency. The majority of ETFs reveal their exact portfolio holdings on a daily basis via their official website. This real time portfolio transparency allows investors to better understand and address portfolio specific risks. While important during times of market volatility, portfolio transparency is just as valuable to any investor seeking to diversify and follow a long-term asset allocation plan.
A transparent portfolio provides the foundation on which to build both proper portfolio diversification and asset allocation. Proper diversification helps to reduce the concentration risk of an investment portfolio. When an investor seeks to diversify, it is important to know exactly what is owned inside that portfolio. Constant portfolio transparency allows for more accurate portfolio data and decisions. In another related effort to address portfolio risk, asset allocation is a method that tailors a portfolio to best fit an investor’s risk tolerance and time horizon. Predictably the more frequent the transparency of the portfolio, the more precise the asset allocation can be.
Accurately implementing and monitoring a portfolio’s asset allocation and diversification is important in all types of market environments. The portfolio transparency of ETFs provides investors with current and complete information to base crucial decisions on. Should market volatility – or risk - increase in 2018, ETF transparency will only matter more to investors as they seek to understand, position and monitor portfolios in light of marketplace risks.
Opinions expressed are subject to change at any time, are not guaranteed and should not be considered investment advice. Diversification does not assure a profit or protect against a loss in a declining market.
Alpha is a measure of investment performance against a market index used as a benchmark.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. One cannot invest directly in an index.
Past performance does not guarantee future results.