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Amazon Is Not The Only Name In Online Retail

When investors think about online retail stocks, certainly the first name that comes to mind is retail behemoth Amazon (NASDAQ: AMZN ). Not only has it surpassed brick-and-mortar competitor Wal-Mart (NYSE: WMT ) as the largest global retailer, but in the growing world of online retail, it holds approximately a quarter of the market share . Amazon will report its first quarter earnings on April 28th after the close. Amazon had a streak going of beating earnings until last quarter when it missed analyst expectations by 38%. Going into this quarter, it faces many of the same issues. The company is heavily reinvesting into business: partnering with Air Transport Services Group (NASDAQ: ATSG ) to boost shipping and logistics, buying content for its newly announced stand-alone streaming video service, and investing in new devices such as the Echo. Despite its position as a market leader and its bright growth prospects, as an investment, Amazon stock is down more than 8.5% YTD versus a positive return of 2.5% for the S&P 500 Index. Thanks to an uncertain earnings outlook coupled with a premium P/E ratio of more than 500X earnings, Amazon has failed to beat the market this year. Fortunately, Amazon is not the only name to play in the online retail space. EQM Indexes launched its Online Retail Index ((IBUYXT)) on December 1, 2015. The Index is now being tracked by the Amplify Online Retail ETF (NASDAQ: IBUY ), which launched on April 20 of this year. The index is comprised of a basket of global companies involved in three primary market segments: online retail, online marketplace, and online travel. The index is NOT capitalization weighted which allows equal exposure to other companies in the industry. The Investment Case for Online Retail Almost everyone has purchased merchandise online. Ecommerce is the fastest growing segment of retail sales. Global online sales are expected to grow 117% by 2018 . So as an investment theme, you can make a strong argument that online retail is a good place to have exposure. Online retail exhibits strong growth characteristics, continues to gain market share relative to brick-and-mortar retail, and is expanding globally. Thanks to advantages such as competitive pricing, shopping convenience, greater product selection, and rapid delivery, online commerce appears to be a disruptive technology that is here to stay. The mall isn’t dead, it has just moved online! Other Names in Online Retail Looking at the year-to-date performance of the stocks within the EQM Online Retail Index, Amazon is not even among the top-ten performers. Indeed, many of the top-performing names are companies that 1) US investors only have limited access to, OR 2) are names that they may not be familiar with. Let’s start with the top-performing name in the Index this year aptly named Start Today ( OTCPK:SATLF ), a Japanese e-commerce apparel retailer. The stock, which trades locally in Japan, but also as a U.S. ADR, is up more than 29% on a US dollar basis this year. Online retailer Overstock.com (NASDAQ: OSTK ) is also up more than 24% this year, after posting strong Q4 results in February. Also up in excess of 23% this year is Canadian-based Shopify (NYSE: SHOP ), a leading cloud-based commerce platform designed for small and medium-sized businesses. Clearly, Amazon stock is not the only game in town! Online retail offers a diverse and global set of opportunities. Indeed, retail is not the only industry that has been transformed by online commerce. Online travel has almost put travel agencies out of business by democratizing the price and availability of travel and vacation options. Besides U.S. names in the online travel space such as Priceline (NASDAQ: PCLN ), Expedia (NASDAQ: EXPE ), and TripAdvisor (NASDAQ: TRIP ), there are many global players that have delivered strong growth and investment performance. Makemytrip Ltd. (NASDAQ: MMYT ) is an India-based online travel retailer that allows travelers to research and plan trips. One of the key strengths of online commerce is that it is not limited by geographic boundaries. While Makemytrip may cater to specific demographics, its offerings are available around the globe. The stock is up 8.9% YTD. So just like ecommerce offers broad access to all types of merchandise, owning a basket of names in online retail offers diversified exposure to this attractive thematic opportunity. That is not to say that all performance is rosy in online-retail land. Chinese online beauty retailer Jumei International (NYSE: JMEI ), online jewelry retailer Blue Nile (NASDAQ: NILE ), and UK food delivery service Just Eat Plc ( OTC:JSTLF ) are all down in excess of 20% this year as they have struggled to execute. Expect more consolidation in the online retail industry, especially in online travel, as the stronger players gobble up their smaller competitors. Expedia acquired competitor Home Away last December in the online travel space. And Japanese travel booking site Ikyu was purchased by Yahoo! Japan in a deal that closed in February . What about other retail ETFs? Interestingly, while other retail sector ETFs offer broad exposure to traditional retail, their exposure to ecommerce and virtual retail is extremely limited. Look at the limited exposure among retail and internet ETF offerings. ETF Ticker # of Online Retail Stocks % Weight AMZN % Weight Non-US? Consumer Discretionary Select Sector SDPR Fund XLY 5 17.17 11.25 N SPDR S&P Retail ETF XRT 12 11.35 1.17 N PowerShares Dynamic Retail Portfolio PMR 1 3.03 0.00 N Market Vectors Retail ETF RTH 2 19.50 14.95 Y First Trust Dow Jones Internet Index Fund FDN 7 30.55 10.18 N as of 12/31/15 Furthermore, most of these ETFs are U.S. focused and fail to offer exposure to the many non-U.S. companies that are innovators in the space. Conclusion In summary, there are many reasons investors should want exposure to a globally diverse basket of stocks focused on online retail sales, rather than owning just a name or two: Get diversified investment exposure to the fastest growing global segments of online commerce: online retail, online marketplace, and online travel Participate in the accelerating growth potential being fueled by trends such as mobile growth and user-interface innovation Gain access to online retail growth opportunities outside the U.S. At the end of the day, the universe of opportunities is broader and more diverse than just Amazon. Disclosure It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. EQM Indexes does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. EQM Indexes makes no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. EQM Indexes is not an investment advisor, and makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth on this website. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by EQM Indexes to buy, sell, or hold such security, nor is it considered to be investment advice. Disclosure: I am/we are long IBUY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Should You Hedge Your Foreign Currency Exposure?

Click to enlarge By Remy Briand, Head of Research, MSCI The volatility of currency has increased in recent years as a combination of quantitative easing and currency wars fuel swings in the foreign-exchange market. CURRENCY RISK TO EQUITY PORTFOLIOS HAS TICKED UP SINCE THE 2008 FINANCIAL CRISIS The chart above shows that the risk to a U.S. dollar-based investor from currencies in international equity exposure has increased significantly since the global financial crisis, according to the latest Barra global equity model . By contrast, the exposure to foreign currencies reduced total risk for a portfolio of developed market equities at times prior to 2004. Many money managers disregard the volatility and leave their exposure to foreign currency unhedged. Or they apply full hedge strategies that can prove costly over time. A more dynamic hedging approach demands a framework to decide which currency to hedge, a mechanism to monitor the indicators and an ability to vary automatically the portion of each currency weight to hedge in a given period (a proportion referred to as a hedge ratio). Which indicators to consider when selecting a hedge ratio There is a long history of research by academics and practitioners who have studied currency hedging strategies. As part of MSCI’s research into risk factors, we have reviewed and modeled those indicators that have proved to be effective in the literature and over time. Our indicators come from four categories: value, momentum, carry, and volatility. The value indicator measures the relative purchasing power of each currency in a pair. Momentum examines currency returns for the previous six months. Carry measures the difference between two-year sovereign yields for both the foreign and home currency. Volatility compares average monthly volatility with the six-month historical average. The ability to hedge foreign exchange risk systematically for any pair of currencies by reference to the four indicators form the foundation of the approach to adaptive hedging that MSCI introduced recently. Though you can view each indicator individually, together they indicate whether or not to hedge and by how much. If the signal points to a possible depreciation of the foreign currency against the home currency, then a hedge may make sense. The chart below illustrates the calculation of the hedge ratio for the Japanese yen from the perspective of a U.S.-dollar based investor. The solid bands of color show periods when an investor should have hedged yen exposure for the respective indicators. INDICATOR SWITCHES AND THE ADAPTIVE HEDGE RATION SINCE MARCH 2012 FOR THE JAPANESE YEN (U.S. DOLLAR-BASED INVESTOR) Click to enlarge Taking the pain out of hedging decisions If you consider each currency represented in the MSCI ACWI Index, calculate the hedge ratios and average them in proportion to the weight of the currency in the index, you get the global average hedge ratio for home-based investors. According to the formula, a U.S.-based institutional investor would need to hedge its global equity allocation by 65% on average, as of March 31. Based on the adaptive hedging methodology, a U.S.-based institutional investor would hedge 75% of their Swiss franc exposure, 50% of their yen exposure, 75% of their euro exposure and 75% of their sterling exposure. Similarly, an investor based in the eurozone would hedge 75% of their Swiss franc exposure, 50% of their yen exposure, 75% of their sterling exposure, and 50% of their U.S.-dollar exposure. HEDGING RATIO FOR KEY CURRENCIES (AS OF MARCH 31) Because the targeted hedging ratios change through time, currency hedges require active monitoring and regular adjustment in portfolios. While long-term investors may decide to leave their allocations to global equities unhedged, investors more sensitive to short-term volatility may prefer a more rules-based form of currency hedging. The adaptive hedging methodology illustrates one approach based on four factors affecting currency behavior. Further reading: The MSCI Adaptive Hedge Indexes: Flexible hedging using a combination of currency indicators Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The V20 Portfolio: Week #29

The V20 portfolio is an actively managed portfolio that seeks to achieve an annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read the last update here . Note: Current allocation and planned transactions are only available to premium subscribers . Over the past week, the V20 Portfolio climbed by 7.9% while the SPDR S&P 500 ETF (NYSEARCA: SPY ) rose slightly by 0.5%. Portfolio Update This week we saw significant volatility in our smallest holding, Dex Media (OTCMKT: OTCPK:DXMM ). Last week speculators drove up the price by more than 100% to a high of $0.28. After Wall Street Journal reported rumor of a planned bankruptcy, shares fell to where they traded prior to the run-up. Of course, the reason the V20 Portfolio holds the stock is not to trade these unpredictable swings. Ultimately the value of the equity will be dependent on the outcome of the negotiation. Prior to the management electing to miss an interest payment, the company still had enough liquidity to keep operations going. Intelsat (NYSE: I ) rallied as the high yield market recovered. Over the past month, shares climbed by almost 50%. As is the case with Dex Media, the company will be facing liquidity issues if it cannot refinance, which is why it is so dependent on the high yield market. The difference is that the company still has a good business that is growing. I believe that the discount arising from this issue will eventually disappear as the company deleverages. We also saw revised Q1 guidance from Spirit Airlines (NASDAQ: SAVE ) this week. Operating margin was increased from 19-20.5% to 21.5%. While it is still lower than what was achieved in Q1 2015, it is still a good sign given the intense competition in the market. Because Spirit Airlines mainly competes on price, I believe that exchanging a temporary dip in profitability for market share is a sound strategy. Our recent stake in an insurance company has not moved much since our purchase, though the company has most certainly continued to collect sizable premiums in the first quarter. I believe that one of the main reasons is the expectation that 2016’s hurricane season will be one of the worst in recent years . As the hurricane season approaches, the market may become increasingly nervous about Florida P&C insurers in general. It is important to remember that we were not betting on the occurrence (or rather absence) of a catastrophic hurricane when we purchased a stake in the company, we were buying its long-term profits. Our biggest position, Conn’s (NASDAQ: CONN ), continued to climb this week, rising 24%. While there were no company specific news, I believe that the stock may have benefited from the recent rally in the energy sector. Due to the company’s concentration in Texas, it is possible that the market perceives the commodity rally as a sign that the job market will improve, leading to more sales and lower delinquencies at Conn’s. Performance Since Inception Click to enlarge Disclosure: I am/we are long DXMM, CONN, I, SAVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.