Main Thesis and Background
The purpose of this article is to evaluate the Amplify Online Retail ETF (IBUY) as an investment option at its current market price. The fund’s objective is “to provide investment results that, before fees and expenses, correspond generally to the price performance of the EQM Online Retail Index. The Index is a globally-diverse basket of publicly-traded companies that obtain 70% or more of revenue from online or virtual sales”. Currently, it sits at $103.40 a share and has paid one distribution in its history of $.15/share, back in December 2019. Due to this inconsistent dividend history, I am not considering the income yield as part of this review.
This is my first take on IBUY, and has come about as we will soon enter an unusual new year in 2021. The COVID-19 pandemic will continue to be a headwind, along with employment and stimulus concerns. Yet, the market sits at record high levels, so determining where best to park capital is a challenging task. While I would not recommend going “all in” on IBUY, or any investment right now, I do see some potential for further gains for this fund. It offers investors exposure to the generational play of rising e-commerce sales. Further, despite what some investors may think, this is not a pure online retail buy. The fund holds many service oriented companies, such as travel websites and ride sharing apps, with consumers purchasing through them. As a result, IBUY will actually benefit from a re-opening of the economy, which sets it apart from other “stay at home” plays.
What’s In A Name?
To begin, I want to take a look at the underlying holdings of IBUY, to properly highlight some of the risks facing the fund. This is important because, as I alluded to in the opening paragraph, investors could easily get the wrong impression about this fund. Yes, it exposes investors to online/e-commerce trends, but there is more to it than simply buying goods through your computer or smartphone. The e-commerce world is more dynamic than it used to be, with consumers using the internet to purchase or book services, reserve hotels and air travel, and hail ride shares. In fact, if we look at IBUY’s portfolio, we see a diverse top ten holdings list, as shown below:
Source: Amplify ETFs
Clearly, investors are getting more than companies that just sell goods online. And this presents opportunity, but also challenges. In fact, some of these companies, despite being e-commerce plays, have seen drops in activity as a result of the pandemic. While this may seem counter-intuitive, given how consumers are staying at home and shopping there in record numbers, consider the business model of some of these companies. For example, Groupon (GRPN) offers discounts to venues and eateries, many of which are closed right now. Further, companies like TripAdvisor (TRIP) and Expedia (EXPE) help customers book hotels, airline tickets, and rental cars online. This has meant a drop in business for these companies, as well as the ride sharing apps and other bookings websites noted in the top ten holdings.
And the result has not been mild. Not surprisingly, air travel is way down on a year-over-year comparison, which drags down hotel and rental reservations with it, as illustrated below:
Source: US Travel Association
My point here is that investors should not necessarily be banking on this investment if they think the “stay at home” model is going to persist for longer than expected, or have a greater impact than expected. IBUY will benefit from more consumers buying online, to be sure, but the underlying companies also depend on consumers being out and about, travelling and partaking in other social experiences.
Therefore, investors should view current lockdowns as an opportunity, but also a risk, with respect to IBUY. While goods consumption has been soaring during the pandemic, consumer spend on services is still negative, which is trickling down to some of IBUY’s top holdings, as shown below:
Source: JPMorgan Asset Management
The point to emphasize here is that IBUY should actually push higher if the economy re-opens faster than expected, whether due to a vaccine or declining case numbers. However, unlike some other pure e-commerce retail plays, IBUY’s holdings face more of a risk that the shutdowns protract for longer than expected. Therefore, investors need to weigh this risk carefully, along with their own perspective on when we will get back to normal, before buying.
Holiday Spending Could Be Very Strong
While I just discussed some of the top holdings in IBUY, I do need to highlight that the fund does have a lot of exposure we would expect to see. For example, the majority of the fund is indeed marketplace and traditional retail offerings. This includes e-commerce plays like Amazon (AMZN), but also movie websites like Netflix (NFLX), pet food plays through Chewy (CHWY) and payment apps like PayPal Holdings (PYPL), as noted below:
Source: Amplify ETFs
Therefore, a rise in spending by U.S. consumers this holiday season will certainly be a bullish attribute for IBUY. Further, this shopping season has started just as the divergence between online and in-store trend has accelerated to record highs, as shown below:
The point here is the timing for online retailers could not be much better. Online spend was already accelerating, and now that more consumers have gotten used to shopping online, they will likely continue this behavior into the most important time of the year for retailers. This is a huge win for the bulk of IBUY’s portfolio.
International Exposure Could Help
My next point looks at the country make-up of IBUY. While the fund is predominately U.S.-focused, it does have some international exposure. In fact, about a quarter of the holdings are based overseas, with Chinese companies representing over 6% of the fund’s total assets, as shown below:
Source: Amplify ETFs
While I tend to shy away from investing in Chinese equities, I actually think this exposure could be beneficial at the moment. The reason being, the Chinese consumer has started to show signs of life, finally reversing the trend of negative retail sales growth this year. In fact, September retail figures were the strongest they have been all year, as illustrated below:
Simply, I see this as an opportune time to start banking on the Chinese consumer. The turnaround appears to have begun, and the transition to a Biden presidency will begin to remove some of the headwinds facing the broader Chinese economy. While I prefer to keep my investment dollars closer to home, this small amount of Chinese exposure does not have me worried, and I actually feel it could be beneficial for the fund in the months to follow.
Almost No Income, A Speculative Play
My tone throughout this review has been fairly positive, and I do feel IBUY has a bright future ahead of it. That said, I do want to manage expectations here. Finding value in this market is an increasingly difficult challenge, and investors need to realize they would be getting into IBUY now at an all-time high. We seem due for a bit of a pullback in equities, even if we continue to see positive news, so I would advocate being selective on new positions. Starting small, and adding on any down days, makes a lot of sense to me.
Adding to that point, investors need to realize this is a speculative play. Top holdings like Lyft (LYFT) and Uber (UBER) have some momentum, but they are not highly profitable companies with clear growth trajectories. Rather, they have recorded heavy losses and face regulatory scrutiny here and abroad. This is not to say they are not good investments, but to emphasize they, and IBUY by extension, is not a “safe” play. The fund is a more speculative option, for those who can afford some risk in their portfolio.
The lack of a defined income stream is also a concern for me, and it suggests many of the underlying companies are not as established as one would get by investing in a diversified large-cap fund. As a result, while I am placing a “bullish” rating on this fund, I want investors to recognize the potential for losses before diving in.
IBUY has hit a new high recently, along with the broader market, and the path ahead continues to look bright. Online spend is up, in the U.S. and abroad, and IBUY offers investors a great way to play one of the most important generational plays in our lifetime. Further, IBUY holds plenty of companies that will benefit from the economy re-opening, so I do not see a lot of the downside risk that will cloud the outlook for other stay-at-home plays. Therefore, I believe a bullish rating on IBUY is justified, and would suggest investors give the fund some consideration at this time.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IBUY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long AMZN