Amplify Macro-Trend Commentary 3Q 2019
Online Retail Commentary
Despite a challenging economic environment for traditional retail, online retail sales continue to grow, and remain the “sweet spot” of retail. The latest data from the U.S. Census Bureau saw Q2 ecommerce sales increase to 10.7% of total retail sales, growing an impressive 13.3% year over year. Meanwhile, traditional retailers remain challenged by the prospect of tariffs on merchandise against a backdrop of changing consumer preferences for online retail and too many physical stores.
Fast-fashion retailer Forever 21 was the latest victim of the brick-and-mortar retail apocalypse. According to Coresight Research, there have been over 8,500 retail store closures so far this year, up from 5,589 in 2018.
Investor risk appetite in retail favored value over growth names during the quarter in the face of macroeconomic uncertainty. But YTD, online retailers continue to outperform relative to their traditional retail peers.
Some of the top contributors during the quarter were Stamps.com, after the beaten-down online postage company reported strong quarterly results and raised its full-year outlook. This was after its surprise decision in February to end its exclusive partnership with the USPS in favor of partnerships with other carriers.
Chinese online retailer Pinduoduo was also a top performer for the quarter, on better-than-expected earnings results. The company’s business model offers shoppers discounts if they encourage friends and social media contacts to shop their site and join in on the deal.
Underperforming names for the period included online styling company Stitch Fix, which declined for the quarter on concerns the apparel company could feel the impact of future tariff hikes. Food delivery giant GrubHub was another underperformer. It is facing heightened competition from services such as Uber Eats, DoorDash, and Postmates, although it did recently rally on the announcement of a new partnership deal with McDonald’s.
Going into the holiday season, forecasts project a robust shopping season as consumer spending remains strong. Retail sales are expected to top $1.1 trillion, growing at a rate of 4-5%. Retailers who prioritize convenience will reap the biggest rewards. Ecommerce sales are expected to grow in the double-digits, up 14-18% to between $144 billion to $149 billion, versus 11.2% growth last year. Mobile sales are expected to account for more than half of total online sales this holiday season up from 40% a year ago. In short, it should be a very merry holiday season for online retailers.
The Amplify Transformational Data Sharing (Blockchain) ETF declined in the third quarter as crypto assets sold off in the risk-off environment. But YTD it has performed well through 9/30/19, thanks in part to a resurgence in digital currency and several positive developments in blockchain technology.
The ETF’s top performer in Q3 was Line Corp, a Toyko-based subsidiary of South Korean search engine Naver. Messaging giant Line just received approval for a cryptocurrency exchange license in Japan. Plus500 Ltd was another top performer during the quarter. Plus500 runs an online trading platform which offers contracts for difference (CFDs) that enable individual trades to take high-risk bets on the future performance of stocks, currencies, and cryptocurrency.
The worst performers in Q3 were crypto merchant bank Galaxy Digital Holdings, which declined as crypto assets declined during the quarter. Similarly, crypto miner Hive Blockchain was down on the crypto sell-off. The BLOK ETF by design remains one of the blockchain ETF most correlated with cryptocurrency. Bitcoin remains 2019’s best performing asset even after its recent price downturn, more than doubling YTD.
Rising institutional interest and increased use cases are paving the way for future growth in blockchain and cryptocurrency. Morningstar just announced plans to become the largest crypto rating agency. Intercontinental Exchange, owner of the NYSE, debuted its new Bitcoin futures contract last month and the Chicago Mercantile Exchange announced it would offer options contracts next year. Walmart and IBM continue to collaborate on technology to track food in its retail supply chain. IKEA just allowed an invoice to be paid in Ethereum. And while Facebook is losing backers for its Libra coin payments network, firms like Goldman Sachs are in the wings initiating similar projects. Blockchain, and its associated applications, has continued to grow at a rapid pace.
Battery Metals & EV Commentary
The Amplify Advanced Battery Metals and Materials ETF (BATT) declined in the third quarter and on a YTD basis as headwinds remain for battery metal stocks.
However, BATT’s diversified approach, giving it exposure to an array of critical metals used in the lithium-ion battery supply chain, such as nickel and cobalt, can help mitigate declines experienced in other metals. In particular, this is shown in the ETF’s current overweight in nickel relative to other metals like lithium.
The top contributing names for the quarter were nickel producers Western Areas, Independence Group, and Vale Indonesia. Cobalt names Nanjing Hanrui Cobalt, Katanga Mining, and Zhejian Huayou Cobalt, were also positive contributors after Glencore announced it was halting production at its Mutanda mine, the world’s largest cobalt mine, causing prices to rise due to worries about supply shortfalls.
The worse performing names were Australian hard-rock lithium spodumene producers such as Altura Mining, Pilbara Minerals, and Lithium Americas, as overcapacity in that region has led to steep pricing declines. Interestingly, lithium brine companies such as SQM, Livent, and Albemarle have held up much better, rallying in the month of September.
Headwinds remain for battery metals and mining stocks for the remainder of the year with continued bearish sentiment for lithium on oversupply concerns relative to weaker global demand and soft pricing linked to tariffs and reduced China subsidies for EVs. But, there are rising shortage concerns for nickel and cobalt, as Indonesia announced it was banning exports of nickel, and Glencore closing its Mutanda cobalt mine in the Congo. There is no new capacity coming online to offset this loss of supply.
Despite a near-term slowdown in EV demand, long-term projections remain positive and with limited battery metal supply coming online, metal shortages should help spur pricing and sales growth among companies in the battery metal supply chain.
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.