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Many e-commerce ETFs have doubled so far this year.Bet_Noire/iStockPhoto / Getty Images

The COVID-19 pandemic threw new challenges at retailers in 2020, with mandated closures of physical stores accelerating the shift to online shopping, creating opportunities for investors in e-commerce exchange-traded funds.

Many e-commerce ETFs have doubled so far this year and, with the retail industry’s crucial holiday shopping season in full swing, investors are wondering if there are more sector gains ahead.

The National Retail Federation in the U.S. is forecasting holiday spending to increase between 3.6 per cent and 5.2 per cent to between US$755.3-billion and US$766.7-billion this year. That compares with an average of 3.5 per cent over the past five years. The numbers include online sales, which are expected to grow between 20 per cent and 30 per cent to between $202.5-billion and $218.4-billion.

“The market has fairly high expectations that this is going to be a fairly good season for retail spending as a whole despite the pandemic – particularly for online and e-commerce retailers,” says Craig Ellis, vice-president and portfolio manager with Bellwether Investment Management.

Valuations of ETFs focused on e-commerce are “starting to look a bit stretched,” Mr. Ellis says, “but that doesn’t mean they can’t go higher.”

There’s also a risk that much of the positive sentiment that comes with the holiday shopping season has already been priced in, says Daniel Straus, vice-president of ETFs and financial products research at National Bank Financial.

However, “online retail is one of those areas where it seems like the momentum behind it is unstoppable,” Mr. Straus says. “It was already a trend that was in place well before the pandemic.”

There are 41 retail-oriented or consumer discretionary ETFs listed in the U.S. and six in Canada, according to Ian Tam, director of investment research for Canada at Morningstar. As of November, these North American ETFs were valued at about $70-billion, with about $300-million of that from Canada, compared to $58-billion a year ago.

Retailers with a strong online presence have soared, such as Inc., but several bricks and mortar retailers have suffered, either filing for bankruptcy or closing their doors for good, says James Gauthier, head of product research and oversight at Industrial Alliance Securities Inc. Examples include J.C. Penney, Pier 1 Imports, Davids Tea and Le Chateau.

“There are the haves and the have-nots” in the retail space, Mr. Gauthier says, exacerbated by the stay-at-home orders during the pandemic.

The issue with some online-focused ETFs, however, is that they have a huge weighting in e-commerce powerhouse Amazon, notes Mr. Straus of National Bank, a stock that’s up by about 70 per cent so far this year (as of Dec. 7). The weighting has helped to drive the performance of those ETFs, but also puts them at risk if Amazon’s stock sinks.

An example is ProShares Online Retail ETF (ONLN-A), which has a 24-per-cent weighting in Amazon, followed by China’s Alibaba Group Holdings Ltd. at about 10 per cent and, Etsy Inc., and Wayfair Inc. at about 5 per cent each. ONLN has nearly doubled so far this year.

For a broader e-commerce ETF pick, Mr. Straus points to the Amplify Online Retail ETF (IBUY-A), which holds 58 U.S. and global retailers and service operators. IBUY, with top holdings including Qurate Retail Inc., Groupon Inc. and Lyft Inc., has had “astonishing inflows,” Mr. Straus says. Its performance has also doubled year-to-date.

There’s also the Global X E-commerce ETF (EBIZ-Q), which is up by about 67 per cent so far this year. EBIZ has half its holdings in U.S. retail stocks and the other half in international shares, with a heavier weighting in travel stocks such as Expedia Group Inc. and Group Ltd. that have smaller gains.

The SPDR S&P Retail ETF (XRT-A), which has risen by about 36 per cent so far this year, is a “safer toe in the water,” says Mr. Straus, since it includes a broad group of 85 large-cap retail stocks in the S&P Retail Select Industry Index. “It’s pretty correlated with the broader market,” he says.

XRT includes more traditional retailers, like Nordstrom Inc., Kohl’s Corp. and other “opening up stocks” that have bounced sharply on positive COVID-19 vaccine news, adds Mr. Gauthier of Industrial Alliance. These are names expected to benefit when shoppers return to their regular in-store shopping experiences.

For investors looking for a broader way to invest in retail, Mr. Ellis of Bellwether points to the iShares Global Consumer Discretionary ETF (RXI-A), a diversified ETF with 148 holdings including big retailers such as Amazon, The Home Depot Inc., Toyota Motor Corp. and Nike Inc.

Mr. Ellis says a benefit is the “fair amount of exposure outside the U.S.,” or about 46 per cent in places like Japan, Europe and the U.K. He says RXI, with a year-to-date return of about 20 per cent, is less daunting when it comes to valuation.

Mr. Ellis also points to the First Trust Nasdaq Retail ETF (FTXD-Q), which holds 50 U.S. retail equities that it weighs based on growth, value and low volatility, as an option for investors. FTXD, which has returned about 16 per cent so far this year, includes holdings such as Walmart Inc., The Kroger Co., eBay Inc., and Amazon.

“What you end up with is a basket of securities that are a little more equally weighted and perhaps a little less stretched,” says Mr. Ellis.

For Canadian-listed retail ETFs, National Bank’s Mr. Straus suggests investors look at the iShares S&P Global Consumer Discretionary Index ETF (XCD-T), or the BMO Global Consumer Discretionary ETF (DISC-T), both of which are hedged to Canadian dollars and hold a variety of U.S. and global multinational retailers, says Mr. Straus. XCD returned 15 per cent year-to-date while DISC is up by about 23 per cent.

XCD is half U.S. stocks, nearly half international and 1 per cent Canadian retail shares. Its top holdings are big retail names like Amazon (8 per cent), Home Depot, Toyota and Nike. DISC is 64 per cent U.S. retail stocks, 34 per cent international and 1 per cent Canadian. Its top stocks are Amazon (at 11.5 per cent), Home Depot, Tesla Inc., The Walt Disney Co. and Netflix Inc.

Regardless of which ETFs investors buy, and on what exchange, Mr. Straus recommends they “lift the hood, look at the top holdings and see if that’s a theme that resonates and go with the one that makes some sense,” based on its holdings and their weightings since they can vary greatly from fund to fund.