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Shoppers carry their purchases along Oxford Street in London on Dec. 13, 2018.

TOLGA AKMEN/AFP/Getty Images

With the holiday season upon us, investors shopping for retail ETFs will find some intriguing options on the shelves that reflect the shift to online from bricks-and-mortar stores.

This year’s shorter holiday shopping calendar (meaning less opportunity to spend money) as well as tariff uncertainty could hit department stores and mall retailers in the United States, Credit Suisse analysts said in a recent report. They expect the record store closures of 2019 to continue into 2020 if better holiday trends don’t materialize.

But retail ETFs and consumer-discretionary ETFs that favour strong players remain relatively robust. These mostly U.S.-focused funds reflect the battle – and blurred lines – between the bricks-and-mortar and online world.

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The Globe asked three experts for some take-homes on investing in the retail sector and to name some interesting ETF picks.

BROOKE THACKRAY, RESEARCH ANALYST AT HORIZONS ETFS MANAGEMENT (CANADA) INC.

Trends such as the summer Amazon Prime Day (with other stores following suit) are spreading out the shopping period, but retail remains a “seasonally valid sector,” Mr. Thackray says. Horizon follows a strict shop-early strategy in its Horizons Seasonal Rotation ETF (HAC-T), which invests in the SPDR S&P Retail ETF (XRT-A) between about Oct. 28 and Nov. 29 each year. That way it’s ahead of the average investor, who typically enters the retail sector in anticipation of Black Friday sales. Mr. Thackray notes that retail has outperformed the S&P 500 in this period 76 per cent of the time, by an average 2.7 per cent. Come Black Friday, the “action has already happened” and gains are priced in, so his fund jumps out. “December is actually a bad month for retail stocks,” he says. “We’re just renting space in that sector.”

The pick: SPDR S&P Retail ETF (XRT-A)

A modified equally-weighted ETF that tracks the overall retail index, XRT is a true reflection of the retail environment, Mr. Thackray says. It has a management fee of 0.35 per cent, is the largest ETF in the category and is diversified across different capitalizations. No one security holds more than two per cent. This fund has performed well in the period leading up to Black Friday, and “it’s not being dominated by one or two or three big stocks.”

The pick: VanEck Vectors Retail ETF (RTH-A)

The other “biggie” among retail ETFs, this fund, with a fee of 0.35 per cent, is much more concentrated – the largest three stocks represent 40 per cent of its holdings. Mr. Thackray especially likes its strong online composition. Indeed, Amazon.com Inc. is top, at just under 20 per cent, and Home Depot Inc. is also up there. “You have to look at the underlying constituents of the fund and if they’re doing well,” he says.


David Kletz, vice-president and portfolio manager at Forstrong Global Asset Management, Inc.

“Retail is a niche, let’s be clear about that up-front,” says Mr. Kletz, who notes that beyond the larger ETFs such as XRT and RTH, there is a “limited universe” of funds, although there are some “interesting constructions” that allow investors to jump on the shopping trends. “The theme of online versus bricks-and-mortar is very well articulated,” he says.

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The pick: Amplify Online Retail ETF (IBUY-Q)

Most retail ETFs are strongly U.S.-based, but this one, with a fee of 0.65 per cent, has as much as 25 per cent global holdings, Mr. Kletz points out. It’s heavily invested in internet shopping, with 70 per cent or more of revenues from online or virtual sales. This includes services such as travel, and one of the largest holdings is an internet-based mailing and shipping company. “If you think that the online-retail business should outperform bricks-and-mortar over the long term, it’s a pretty interesting vehicle,” Mr. Kletz says.

The pick: ProShares Long Online/Short Stores ETF (CLIX-A)

CLIX is a “unique way to access the space,” Mr. Kletz says, with a formula that has long exposure to online retailers and short exposure to stocks of traditional stores. “It’s betting on the online slice of the retail sector to outperform the bricks-and-mortar sector,” he explains, which requires investors with more familiarity in the sector. “It’s definitely more of advanced strategy.” It has a fee of 0.65 per cent and remains small “but is pretty innovative.”


LARA CRIGGER, SENIOR STAFF WRITER AT ETF.COM

Ms. Crigger expects that “the impact of trade wars and U.S.-versus-everybody tariffs will likely weigh heavily on retailers this season.” Online retailers with lower overhead might be more shielded from the rising cost of goods, she says, “but maybe not, since so much of their stuff is sourced from China.” Rather than the limited number of straight and rather niche retail ETFs, Ms. Crigger suggests that investors take a look at consumer-discretionary funds that are liquid, low-priced and include a basketful of diversified retail holdings.

The pick: Consumer Discretionary Select Sector SPDR Fund (XLY-A)

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With 55 per cent of its holdings in the sector, including online, direct-marketing and specialty retail, XLY is “significantly allocated” to retail, Crigger notes. This includes Amazon, Target Corp. and Dollar General Corp. “If you believe there will be a retail jump over the holiday, you should expect to see a jump in your consumer discretionary funds,” she says. XLY’s portfolio of 65 stocks includes hotels and car improvements, with high trading volumes and a reasonable fee of 0.13 per cent.

The pick: Vanguard Consumer Discretionary ETF (VCR-A)

Another fund that’s high in diversified retail stocks, (29 per cent) and specialty retail (21 per cent), Ms. Crigger likes VCR’s low-low 0.10 per cent fee, which makes it “very liquid.” It has a similar concentration as XLY in Amazon as well as a smattering of more traditional retailers, with 300 holdings in all. It is an “extremely large fund,” she says, with high trading volumes, but should appeal to long-term buy-and-hold investors.

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