Know what's in your ETFs: Wild divergence in retail funds to start 2023

Published Wed, Jan 11 202310:27 AM ESTUpdated Wed, Jan 11 202310:56 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

A busy first week of 2023 for the retail industry has led to big swings in the sector's stocks and wide divergence among some seemingly similar exchange traded funds. The industry has seen some major individual stock moves in the opening days of the year, with Bed Bath & Beyond warning of potential bankruptcy and Macy's scaling back its financial guidance . The maker of yoga pants and athleisure wear Lululemon also said it expected gross margins to shrink in the fourth quarter, a sign that high-end retailers could also be in for a choppy year. At the same time, several online retail stocks have boomed, thanks in part to China abandoning its zero Covid policy. That has created a large gap between some retail ETFs, with broader funds lagging behind those with an e-commerce focus. For example, the Amplify Online Retail ETF (IBUY) and ProShares Online Retail ETF (ONLN) gained 7.7% and 8.1%, respectively in the first five trading days of the year. Those funds both have sizeable exposure to Chinese stocks such as Alibaba and Pinduoduo . The Emerging Markets Internet & E-Commerce ETF (EMQQ) , which is heavily weighted toward China, jumped more than 12%. IBUY YTD mountain Online retail ETFs like IBUY are off to a fast start in 2023. The U.S.-centered SPDR S & P Retail ETF (XRT), meanwhile, rose 3.3% — beating the S & P 500, but lagging its digitally focused peers. This divergence could be part of a shift back to tech stocks that Wall Street has seen at the start of this year, as well as part of a potential preview of the macroeconomic environment in 2023. While some retailers are more defensive in nature and may prove relative winners in a slowdown, sector ETFs, because of their broad diversification, also give investors exposure to companies that were already struggling before any potential recession hits the United States. "It's a hard trade to go into. And I think those ETFs that have exposure to like a Nordstrom [could struggle]. Those companies have massive inventory overhang, and they'll have to slash all of their product. ... They're cutting everything. It will be a fire sale," said Andrew Smith, chief investment strategist at Delos Capital Advisors. But that recession narrative doesn't necessarily apply in China, where government officials have eased public health restrictions and seem willing to endure a wave of Covid infections in order to open the economy. That could mean the Chinese consumer sees a big rebound this year. "China looks to be the only major economy to see GDP growth to accelerate from 2.4% in 2022E to 5.3% in 2023E driven by reopening," Pierre Lau, Citigroup's China equity strategist, said in a note to clients on Monday. Lau listed the consumer and internet sectors as areas where investors should be overweight in China. The continued weakening of the U.S. dollar could also benefit international stocks, boosting ETFs with more global exposure. To be sure, some of the gains in Chinese stocks comes not just from the reopening but also signs of looser regulation. Last week, Ant Group received approval to expand its consumer finance business , a sign that Chinese government officials may be shifting to lighter oversight of tech companies. Internet retailers including JD.com traded higher following that news, but betting on the direction of Chinese regulation has burned investors in recent years. Any reversal there could push retail ETFs that also hold more traditional "brick-and-mortar" stores, back into the lead. — CNBC's Michael Bloom contributed to this report.