First the bad news for your wallet: Americans are slated to spend more than they ever have this holiday season - around $730 billion in November and December, according to the National Retail Federation.
Online shopping alone is expected to amount to $143.7 billion over the last two months of the year, a 14.1% increase over last year, according to projections by Adobe Analytics.
Now the good news: There is money to be made on the other side of that trade.
E-commerce exchange-traded funds are set up to capitalize on all those online transactions by gathering a bucket of stocks of companies like Amazon (AMZN), eBay (EBAY) and PayPal (PYPL) and selling shares of them as a specialized ETF.
Top players include First Trust Dow Jones Internet Index (FDN/IV), Global X E-commerce (EBIZ), Amplify Online Retail (IBUY) and International Online Retail (XBUY), ProShares Online Retail (ONLN), ProShares Long Online/Short Stores (CLIX) and SPDR S&P Internet (XWEB).
There is even a new index created by MSCI, a provider of analytics and solutions for financial firms, which identified the digital economy as one of its societal "Megatrends." That likely means that more such ETFs will be in the pipeline, since investment firms can now roll out their own e-commerce ETFs based on that underlying index.
A few tips for investors who might be stuffing e-commerce ETFs into their holiday stockings:
Look under the hood
Not all e-commerce ETFs are built alike. Some are highly concentrated, and some are more diversified, so proceed according to your own risk tolerance.
ProShares Online Retail, for example, has almost a quarter of its entire assets in Amazon, and another 13% in Chinese Internet giant Alibaba (BABA). If you want to bet on the big winners - and Amazon has certainly been a big winner - that would be the way to go, said Todd Rosenbluth, head of ETF and mutual fund research at independent research firm CFRA.
But Amplify’s IBUY has Amazon making up only a more modest 3.4% of its portfolio. If you want to spread your bets more evenly throughout the space, that would be a more appropriate pick.
Dig into the numbers
Fees are any portfolio’s silent killer. Concentrated ETFs may offer lower expense ratios than traditional mutual funds, but higher than broader exchange-traded offerings - like, say, Vanguard’s Total Stock Market ETF (VTI), and its microscopic .03% fees.
In comparison, the relatively new Global X E-Commerce comes with a .68% expense ratio, and ProShares Long Online/Short Stores carries a similar .65% charge.
As for performance, e-commerce ETFs have generally experienced a bumpy fall, thanks to trade wars and recession worries. IBUY, for instance, has outperformed the S&P 500 (.SPX) on a two-year timeframe, but underperformed year-to-date. While that offers a potential buying opportunity, ask yourself whether you are comfortable with an occasionally wild ride.
“Typically investors will find more volatility in narrower slices of the market like this,” said Deborah Fuhr, founder and managing partner of independent London-based ETF consultancy ETFGI.
Expand your horizons
The United States may be the 800-pound gorilla of e-commerce, but there is money to be made outside its borders as well. To wit: the Emerging Markets Internet & Ecommerce (EMQQ/IV), suggested Fuhr. Its basket includes familiar Chinese names like Baidu (BIDU) and Tencent (TCEHY), and boasts robust year-to-date returns of over 32%.
Consider size and scope
In the ETF world there is a fair amount of churn: If small thematic funds do not manage to attract enough assets, they occasionally close up shop. So check the total assets and know that a fund’s long-term future is not guaranteed.
Thematic ETFs are a complement, not a core
Thematic ETFs are a nice complement to a more broadly diversified portfolio. But notes Rosenbluth: “Investors shouldn’t get carried away with them.”
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