Is this the best ETF to profit from the rise of e-commerce theme?

A new thematic ETF gives investors e-commerce exposure without too much Amazon. 

When it comes to investment themes, the ‘rise of e-commerce’ may seem like an obvious one for exchange-traded fund (ETF) issuers to jump on. So it is perhaps strange that there are not that many e-commerce ETFs available, for UK investors at least.

Since 2018, investors have been able to gain e-commerce exposure through the L&G Ecommerce Logistics ETF (LSE:ECOM). This ETF doesn’t include companies involved in the retail side of online shopping. As the name suggests, it is focused on logistics service providers and technology companies that are enabling e-commerce, using the Solactive eCommerce Logistics Index. Another option for investors has been the EMQQ Emerging Markets Internet & Ecommerce ETF (LSE:EMQQ). This ETF allows investors to gain exposure to the theme in emerging markets.

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So, both of these ETFs offer exposure to the e-commerce theme. However, it is through some alternative method, either by exposure to the logistics companies making the online delivery ecosystem work, or companies catering to buyers in emerging markets. What about those who want more of a conventional exposure to the theme? One new option is the Global Online Retail ETF (LSE:IBUY).

This ETF was launched last month and tracks the QM Global Online Retail Growth Index. This index is composed of 47 companies. The index’s inclusion requirement states that the companies need to derive at least 60% of their revenue from online retail or online marketplace commerce sales. The companies must also demonstrate a positive year-over-year quarterly revenue percentage growth to be selected. The ETF has an ongoing charge of 0.69%

Is it all just Amazon?

It is reasonable to think that an e-commerce focused ETF would just be dominated by Amazon (NASDAQ:AMZN). The company after all dominates both the online shopping world and the US stock market. While there’s nothing wrong with having exposure to Amazon, investors may already have exposure to the firm via other passive strategies and also active funds, such as through global or US funds.

Thankfully, the index this ETF tracks is designed to protect against this. Each company in the index is assigned an initial weight according to its year-over-year quarterly revenue growth percentage. This means that companies with better revenue growth receive a greater weighting. As a result, the world’s largest e-commerce companies, such as Amazon, do not automatically have a huge weighting.

As a result, the portfolio’s current top five holdings, as of 20 April, were HelloFresh (XETRA:HFG), Etsy (NASDAQ:ETSY), Delivery Hero (XETRA:DHER), Doordash (NYSE:DASH), and Peloton Interactive (NASDAQ:PTON). Each of these holdings accounted for over 5% of the portfolio. So, investors in this ETF would get exposure to these relatively smaller players in the e-commerce theme – companies that they likely do not already have a huge exposure to. Amazon is not absent. But it is the ETF’s 20th-largest holding, account for 2.3% of the portfolio. That is just above Boohoo (LSE:BOO), the British clothes retailer.

There are also some caps on weightings, such as 6% on any individual stock and 20% for emerging market companies as a whole.

Similar to EMQQ?

HANetf is the ETF issuer behind both IBUY and EMQQ. So, it is worth investors investigating the extent of overlap in holdings between these two e-commerce focused products. First, it is worth noting that the index providers are both different companies. Second, IBUY has a global focus and EMQQ has an emerging market focus. It seems as if the idea is that this ETF is to be complementary to EMQQ. IBUY provides global exposure to the e-commerce theme, while EMQQ provides more specialist emerging market exposure. However, there is some notable overlap between the two ETFs.

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By my own count, at the time of writing, eight of the holdings in IBUY are also included in EMQQ. These stocks were KE Holdings (NYSE:BEKE), Pinduoduo (NASDAQ:PDD), Alibaba (NYSE:BABA), JD.COM (NASDAQ:JD), Ozon (NASDAQ:OZON), Delivery Hero (XETRA:DHER), Vipshop Holdings (NYSE:VIPS) and MercadoLibre (NASDAQ:MELI). Collectively, these stocks accounted for over 21% of IBUY’s portfolio at the end of April.

Assuming these stocks are also all classified as emerging market, this exposure should be reduced at the next rebalance. However, even if the overlap falls to just under 20%, that is still notable. Importantly, some of these eight overlapping stocks have significant weightings in the EMQQ portfolio. For example, Alibaba accounts for over 8% in EMQQ. Together, these eight stocks account for over 30% of the EMQQ portfolio.

Whether investors care about this overlap is up to them. However, it is worth keeping in mind that if you already own EMQQ, buying IBUY will mean exposure to several holdings you already have significant exposure to.

It is worth noting, however, that both ETFs use different index providers, so have different methodologies. Therefore, the overlap between the two has the potential to change significantly.