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Online Shopping Gaining Traction: ETFs to Buy

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Retail earnings for the second quarter and retail sales data for July went in two directions with the former bringing back long-lost hopes and the latter giving a rude shock. The reason for this deviation was better-than-expected results from several departmental stores while web-based shopping was among the sweet spots in the July retail report card.

Though these retailers performed miserably in the first quarter, most of them turned around in the second quarter. Macy’s Inc. M and Kohl’s Corporation KSS beat on both lines. Nordstrom Inc. JWN and J.C. Penney Company Inc. JCP exceeded the consensus mark on the bottom line but narrowly missed the top line estimate. Nordstrom alsobeefed up its earnings guidance. All of the companies’ shares soared post earnings, spreading cheer in the broader retail space (read: Should You Buy Retail ETFs Now?).

Investors should note that several analysts are attributing this sudden success of retailers to extremely pessimistic earnings estimates which were in fact easy to beat. Plus, piles of inventories have finally started to level out and come in line with sales (read: Are Retail Earnings Really Improving?).

What About Earnings at Online Retailers?

Chinese e-commerce giant, Alibaba Group Holding Limited’s BABA first-quarter fiscal 2017 (ended June 30, 2016) earnings of 52 cents per share crushed the Zacks Consensus Estimate of 38 cents. The adjusted figure excludes one-time items but includes stock-based compensation expense.

Revenues climbed nearly 59% year over year to 32.15 billion yuan ($4.84 billion). Revenues were also higher than our consensus estimate of $4.5 billion (read: Alibaba Stock Up on Healthy Q1 Earnings: ETFs in Focus).

Yet another online retail behemoth Amazon.com, Inc. (AMZN - Free Report) came up with strong second-quarter earnings results on July 28. Aside strong growth in both earnings and revenues, Amazon easily outpaced our consensus estimates.

For the ongoing third quarter, the company expects revenues to grow 22–32% to $31–$33.5 billion. Incredible growth in its Prime service, AWS division, and Prime Day sales is poised to boost its performance further in the coming months (read: ETFs to Gain as Amazon Crushes Q2 Estimates).

E-commerce giant eBay Inc’s EBAY Q2 earnings were in line and revenues beat estimates. There was more from eBay to impress investors as management raised the guidance and the company's board approved an incremental $2.5 billion share repurchase program (read: eBay Jumps on Q2 Earnings: ETFs to Play).

What Does July Retail Sales Say?

Retail sales were flat (sequentially) in July aftergrowing for the third consecutive month in June and also fell short of the market expectation of a 0.4% gain. Sales at nonstore retailers grew 1.3%, the same pace as in June. Also, motor vehicles and parts dealers saw a 1.1% rise in sales. Excluding autos, retail sales last month slipped 0.3% -- “the weakest reading since January, after a 0.9% gain in the prior month.”

Other bright spots were furniture which witnessed a 0.2% expansion in sales and miscellaneous store retailers logging 0.3% rise.

Department store sales declined 0.5%. Sales at gasoline stations dived 2.7%, thanks mainly to muted gas prices. On a year-over-year basis, July sales rose 2.3%, slackeningfrom a 2.7% rise in June.

Online Retailing Gaining Precedence?

Several analysts believe that Amazon’s Prime Day sale on July 12 was its biggest ever, which in fact ate away the brick-and-mortar’s share of revenues. If this was not enough, as per the Earnings Trends issued on August 10, 2016, total earnings of the reported retailers are up 8.1% from the same period last year on 8.7% higher revenues. However, such flattering growth rates are mainly due to the stellar Amazon report. About 45.5% (which is the below the index average) of retailers surpassed on earnings and a meagre 18.2% exceeded revenue estimates.

Which ETFs to Play?

While the recent success of departmental stores ushered in nice gains on broader retail ETFs, the undercurrent is in favor of online retailing.

Macy’s announced the closure of 100 locations and also indicated that online stores have undermined conventional mediums of shopping and will keep depressing it in the coming days. Walmart is acquiring Jet.com, an online retailer operating for two years, for over $3 billion (£2.3 billion) as it seeks to touch up its Internet retailing strategy in a bid to draw near Amazon.

All in all, continued migration toward online retailing can’t be ignored, no matter how impressive earnings have been delivered by traditional retail stores lately.

This situation makes it crucial to go beyond broad-based retail ETFs like VanEck Vectors Retail ETF RTH or SPDR S&P Retail ETF XRT. Instead, investors may give a special look at pure-play Amplify Online Retail ETF (IBUY). Except this, it is hard to get targeted exposure to online retail. But several consumer discretionary and Internet funds serve this idea to a large extent.

For example, EMQQ Emerging Markets Internet & E-commerce ETF (EMQQ), First Trust Dow Jones Internet Index Fund (FDN) with considerable exposure on Amazon and eBay. Other consumer discretionary ETFs that can get you to Amazon are RTH, Consumer Discretionary Select Sector SPDR Fund XLY, Fidelity MSCI Consumer Discretionary Index ETF FDIS and iShares U.S. Consumer Services ETF (IYC.

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