In 2020, the biggest boom of the year was in bankrupties. Big names such as JCPenney (OTCMKTS:JCPNQ), Neiman Marcus and Stage Stores (OTCMKTS:SSINQ) all filed for Chapter 11, and many more retail stocks are yet to follow. Retail disruption was a theme on many investors’ minds before the pandemic hit, but the impact of the coronavirus hastened the switch from in-store commerce to ecommerce. Rather than fleeing brick-and-mortar retailers outright, however, there’s a way to benefit from the retail disruption by going long ecommerce and short brick-and-mortar stores.
ProShares Long Online/Short Stores ETF (NYSEARCA:CLIX) streamlines the process by providing a portfolio of companies that investors can benefit from, and InvestorPlace spoke with ProShares’ Global Investment Strategist, Simeon Hyman, to understand how the CLIX ETF works:
John Kilhefner, Managing Editor, InvestorPlace: Can you describe how ProShares’ long-short approach to CLIX works?
Simeon Hyman, Global Investment Strategist, ProShares: CLIX enables investors to tap into both sides of the retail disruption opportunity. It combines a 100% long exposure to retailers that primarily sell online or through other non-store channels, such as Amazon (NASDAQ:AMZN), Alibaba (NYSE:BABA), eBay (NASDAQ:EBAY), with a short 50% exposure to traditional brick-and-mortar retailers.
InvestorPlace: What is the methodology behind the selection of retail stocks for both the long and short categories?
Hyman: For the long side, the index CLIX tracks pinpoints retailers that principally sell online or through other non-store channels. The index uses a modified market capitalization weighting approach.
For the short side, it equally weights retailers that rely principally on revenue from physical stores.
The modified market cap weighting on the long side effectively balances an emphasis on size, scale, and industry leadership, while providing meaningful diversification. The equal weighting of the short side well-captures “across-the-board” challenges of physical store retailing.
InvestorPlace: What are the factors driving online retail growth in 2020 and beyond?
Hyman: The pandemic has accelerated a persistent trend. It might surprise people that the last report on E-Commerce from the Census Bureau showed only around 16% of domestic retail sales transacted online. But that was a substantial increase from roughly 11% at the end of 2019. The shift may very well stay in high gear. One glaring example: second quarter E-commerce food and beverage sales increased over 100% from the first quarter, and over 220% over the second quarter of last year.
InvestorPlace: How far along is the sector in its transition from brick-and-mortar to online retail?
Hyman: E-commerce’s low penetration points clearly to the transition being in the early innings. Strong online sales growth from some legacy brick-and-mortar retailers leads some to believe the transition is further along. Many of the legacy bricks-and-mortar players that are successfully growing their online businesses still face challenges. Walmart’s (NYSE:WMT) strong online sales growth—nearly doubling in three years—is often cited by those who no longer see a meaningful distinction between bricks-and-mortar and online retailers. A look at Amazon’s and Walmart’s margins makes the case for such a distinction. Amazon’s near doubling of its online sales has produced dramatic EBITDA margin improvement, while Walmart’s has produced a steady decline. It is another key reason, that indeed, the distinction between online and brick-and-mortar retail is still an investment distinction worth making for quite some time.
InvestorPlace: In which ways has the coronavirus affected the landscape of retail stocks? Has it altered the approach to CLIX?
Hyman: As noted above, the pandemic has accelerated, perhaps permanently, the incessant shift towards online retail. It has also exacerbated the pain on the brick and mortar side, with store closings and bankruptcies dramatically on the rise. CLIX remains well-positioned for these impacts.
InvestorPlace: How would a possible recession and lowered consumer spending affect the thesis for the CLIX ETF?
Hyman: The pandemic’s pain has been disproportionately felt on the brick-and-mortar side of retail. It may very well be that a recession’s pain would be skewed similarly. CLIX’s long exposure to online retail, and short exposure to brick-and-mortar retail could thus be well positioned.
On the date of publication, John Kilhefner did not have (either directly or indirectly) any positions in the securities mentioned in this article.
In The InvestorPlace Q&A, we invite a manager to speak directly to Main Street investors, whether discussing their firm’s technologies, strategies or investments for the year ahead. Our goal is to put the spotlight on fund managers and other institutional investors of note, providing a detailed look into their management styles, world views and investing strategies. Read past interviews here.
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