News of the new shop sent shares of Etsy, which has a market capitalization of $1.9 billion, down more than 3 percent in midday trading.
Etsy, which has been under pressure from activist investors, has been seeking to improve profitability and revive its waning sales.
Amazon Handmade , launched in 2015, sells goods like like jewelry, stationary and party supplies in 30 countries. More recently, the microsite has expanded into clothing, shoes and pet supplies.
The newly announced gift shop — which sells for occasions like weddings and Halloween — caters to celebratory events in which shoppers tend to buy homemade gifts.
These are also the festive buyers Etsy has has sought to catch.
"Etsy shines specifically in three types of purchase occasions: celebrations, gifting and style," said CEO Josh Silverman in its second-quarter earnings call.
"If you think about it, these types of occasions happen regularly throughout the year. These occasions drive purchases across six primary categories, clothing and accessories, home and living, jewelry, craft supplies, art and collectibles, and paper and party supplies."
Etsy has struggled since its 2015 IPO as sales slowed and new channels — like Amazon and Instagram — created alternative platforms for the independent sellers Etsy caters to. The company has also had to pour more money into marketing, after years of being able to rely on word-of-mouth.
Earlier this year, activist hedge fund Black and White Capital, which revealed a roughly 2 percent stake in Etsy, urged the company to explore a potential sale. Investment firms TPG Group Holding Advisors and Dragoneer Investment Group also jointly reported a stake, though have since reduced it.
For Amazon, the bulking up of its artisan business is representative of its broader push to focus on the "softer side" of retail. The Seattle-based giant has for years established its dominance by focusing on data and efficiency. As it looks to further expand into retail and now crafts, it is seeking to prove it can also excel with more personal items.
"Every item on Amazon Handmade has a story behind it — and after hearing from customers and artisans, we are thrilled to make gift shopping an experience they will look forward to," said Katie Harnetiaux, a spokeswoman for Amazon Handmade.