A strong holiday shopping season is being predicted for 2018, with analysts at brokerage firm Edward Jones calling for a 5% increase in sales from last year, down slightly from the 5.6% year-over-year (YOY) growth rate posted in 2017, but still above the 5-year average, Barron's reports. More good news for retailers in 2018: inventories look lean, there's an additional shopping day before Christmas compared to 2017, and investments in ecommerce initiatives by brick-and-mortar stores appear set to pay off.

Another Barron's article suggests that investors consider these 9 retail ETFs: Amplify Online Retail ETF (IBUY), Direxion Daily Retail Bull 3X Shares (RETL), First Trust Nasdaq Retail ETF (FTXD), Invesco Dynamic Retail ETF (PMR), ProShares Decline of the Retail Store ETF (EMTY), ProShares Long Online/Short Stores ETF (CLIX), ProShares Online Retail ETF (ONLN), SPDR S&P Retail ETF (XRT), and VanEck Retail Vectors ETF (RTH). Performance data on these ETFs are in the table below.

Retail ETF YTD Total Return
Amplify Online Retail 8.3%
Direxion Daily Retail Bull 8.9%
First Trust Nasdaq Retail 14.1%
Invesco Dynamic Retail 5.1%
ProShares Decline of the Retail Store (7.5%)
ProShares Long Online/Short Stores 4.7%
ProShares Online Retail NA
SPDR S&P Retail 7.6%
VanEck Retail Vectors 16.0%

Sources: Bloomberg and Morningstar Direct, as reported by Barron's; computed as of Nov.13.

Significance for Investors

Barron's notes that, since 2007, stocks in the S&P Retail Select Industry Index have produced an average return of 5% just in the short time period ranging from the week before Black Friday through the following week. Using ETFs is a way to make a diversified play on this season trend. In choosing among them, however, Barron's advises investors to be aware of significant differences in design. The SPDR S&P Retail ETF is an equal-weighted portfolio 100 different retail stocks, and includes many retailers, such as sellers of automobiles and auto parts, that normally do not participate in the holiday shopping rush. It also has only an 18% weight in ecommerce players.

The 3 ProShares ETFs are designed for investors who are bullish on ecommerce and bearish on traditional brick-and-mortar stores. The Decline of the Retail Store ETF has equal-weighted short positions in 56 brick-and-mortar retailers. The Long Online/Short Stores ETF has two-thirds of its portfolio in long positions on ecommerce players, and the other third in short positions on brick-and-mortar stores. The Online Retail ETF is at the other end of the spectrum, composed of long positions in online merchants, but assembled on a capitalization-weighted basis. The Amplify Online Retail ETF, by contrast, is an equal-weighted portfolio of 43 stocks.

"After years of [brick-and-mortar] retailers being on defense, now they're on offense." —Randal Konik, Jefferies Financial Group

Source: Barron's

As the performance of the ProShares ETFs indicates, traditional retailing in physical locations is far from dead. Randal Konik, an analyst who covers apparel retailers for Jefferies, finds that brick-and-mortar merchants have really stepped up their game when it comes to competing against online rivals. "They've sped up their supply chains and in some cases improved delivery times from five to six days to two to three days," he observes, per Barron's.

Looking Ahead

Despite recent history, which suggests that retail stocks as a group should surge around Black Friday, there is no guarantee that this seasonal pattern will repeat itself this year, even if rosy forecasts about holiday shopping come to fruition. Also, for investors focused on the longer term, all categories of retailers are bound to face rough sledding if the economy slows considerably.