Within the thematic space, the e-commerce industry can serve as a multi-industry game on high consumption
expenses combined with rapid technological growth. As many investors know, e-commerce has been
has been growing for several years, supported by mobile and internet penetration. E-commerce has grown steadily in the mid-teen percentage range since 2010, but the COVID-19 pandemic has pushed e-commerce growth to the high 30% range throughout late 2020 Now, with an average annual growth of around 6.6% in 3Q21, the growth rate has diminished and seems a little “less exciting” at first glance. However, e-commerce sales continue to show positive growth at a more sustainable level than previous years despite tough competition in 2020 and 2021. E-commerce sales also remain a high share of overall retail sales at low levels. above 13% since 3Q20, compared to 11% before the pandemic. Today’s note discusses the S-Network Global E-Commerce Index (ECOMX) and how it captures e-commerce growth and future retail trends.
Why e-commerce now?
Several global trends have contributed to the strength of e-commerce. First, e-commerce has excelled alongside growth in mobile and internet usage. Although it seems like the typical American household already owns several cell phones, tablets, and laptops, global cellular coverage is still extremely limited, reaching only 15% of the world.1 As cellular coverage expands with With the help of 5G and commercial satellites, access to online shopping and e-commerce could increase. Second, consumer habits have changed. Supply chain issues have raised fears of shortages, especially for food, beverages and other essential groceries. As long as funds are available, there is less opportunity risk to purchase additional foods/commodities rather than running out early (e.g. toilet paper at the height of the COVID-19 pandemic). These habits, in addition to moving to the suburbs and spending more time at home, have led to an increase in bulk purchases (bulk product has increased by more than 2% since 2019 according to some sources), which may be cheaper and easier to order online. .2 Third, remote work has increased with up to 11% of total US workers telecommuting in December 2021 (for more corporate positions – measured by those with a bachelor’s degree or higher – these percentages were order of 20 to 25%). .3 With fewer consumers commuting in the afternoon, it’s not as easy to stop at the stores on the way home from work. Instead, consumers may find it easier to order online, especially given the faster shipping times (i.e. next day, same day). While companies like Amazon (AMZN) have led the push for faster shipping times, other logistics companies may become more competitive with the growth of automated and electrified last-mile delivery services, for example, Companies like United Parcel Service (UPS) and FedEx (FDX) are investing capital to modernize their delivery fleet for faster, more efficient delivery.
ECOMX supports e-commerce trends with a multi-industry approach to retail strength.
The ECOMX Index is constructed to represent the breadth of the e-commerce space and comprises 60 equally-weighted components evenly distributed across each of its four main business segments: online marketplaces, online retailers, content browsing and e-commerce infrastructure. Online marketplaces are among the best-known and largest beneficiaries of the e-commerce space, including constituents like Amazon (AMZN) and eBay (EBAY). These online marketplaces connect buyers with multiple sellers, usually through a website and mobile app. Additionally, most traditional brick-and-mortar retailers have changed their business models to incorporate online retail. For example, large retailers like Walmart (WMT) increased their online net sales by more than 30% in the first nine months of 2021 compared to the same period in 2020.4 These online marketplaces/retailers are typically enabled by content navigation providers (e.g. advertisements, social media, consumer tracking). Finally, companies that provide infrastructure for e-commerce growth include everything from warehouses that hold inventory to transportation companies that can deliver goods around the world or as close as store to home.
With the majority of online marketplaces and online retailers being considered consumer discretionary stocks, this sector’s weighting in the ECOMX index is currently around 40%. But the index is further differentiated from other consumer retail indices (which typically hold a 100% weighting towards consumer discretionary/staples) by a heavy weighting of technology and industrials-oriented sectors. The larger allocation to technology-focused sectors gives the index higher risk/reward potential compared to pure-play consumer indices.
Conclusion:
Investors who believe traditional retail models are changing may look to the growing e-commerce space. Due to its tilt towards higher growth technology-focused stocks, indices like ECOMX may be able to offer higher reward in exchange for higher risk compared to traditional retail peers.
The S-Network Global E-Commerce Index (ECOMX) is the underlying index of the First Trust S-Network
E-commerce ETFs (ISHP)
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[1] Iridium Satellite Communications
[2] Two years into the pandemic, shoppers are still hoarding – WSJ
[3] Effects of the COVID-19 coronavirus pandemic (CPS) (bls.gov)
[4] Walmart 3Q2020 10-Q (sec.gov)
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