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Sign of the Bottom? New ETFs Will Bet Against Beaten-Down Retail Stocks
Planned ETFs to bet against brick-and-mortar retailers could prove a contrarian signal
New ETFs are in the works to allow traders to profit from the struggles of brick-and-mortar retailers.
Contrarians, take note.
Such niche launches of exchange-traded funds have regularly presaged turning points in their respective markets.
On the surface, now would seem like a fertile time to launch ETFs designed to bet against traditional retailers. The SPDR S&P Retail ETF is down 11% so far in 2017 to its lowest price in a year, driven by a steady stream of bad news. Amazon.com Inc.’s $13.7 billion bid last month for Whole Foods Market sent traditional supermarket chains into a tailspin, retailers are closing stores at a record pace and Abercrombie & Fitch Co.’s failure this week to find a bidder sent a message that private equity firms are wary about wagering on turnarounds.Against this backdrop, ProShare Advisors, the 10th largest ETF provider by assets, filed plans with securities regulators last week for new double- and triple-levered ETFs designed to rise on days that retail stocks fall. Also coming is an ETF that goes “long” online retailers while “shorting” traditional ones.
Investors sometimes view new ETFs as contrary market signals because of the amount of time it can take to turn an idea for a new fund into reality. Because such products must meet a series of regulatory and exchange-specific requirements, it typically takes months, and sometimes years, for an idea to leap from preliminary filing to tradable ETF. In some cases, fund companies register for ETFs and wait for a ripe time to debut.
That means that a once-popular trade will sometimes already have started to lose its luster by the time an ETF hits the market.
With the benefit of hindsight, the debut of the Market Vectors Rare Earth/Strategic Metals ETF, in late 2010, marked the peak of a speculative frenzy in producers of materials such as yttrium, which is used in products ranging from electronics to auto parts.
And don’t forget “yieldcos,” public companies spun off by parents in the renewable energy industry, including Terraform Power, which was shaved off from SunEdison in 2014. The Global X YieldCo Index ETF hit the market in May 2015, reached its all-time high four days later, and has fallen 22% since.
New leveraged or inverse ETFs often arrive in pairs, with “bullish” and “bearish” iterations hitting at the same time. In these cases, the presence of new products can signal simply that a long-term trend might be due to reverse. After ProShares and Direxion Funds launched new biotechnology stock ETFs in summer 2015, the highflying segment fell off the rails.
Another example is the mainland Chinese stock boom and bust that started in 2014 and unraveled the next year. Direxion launched leveraged and inverse ETFs linked to these so-called A-shares, which trade in Shenzhen and Shanghai, just days after the market peaked.
Of course, some new ETFs can be well timed. The PureFunds ISE Cyber Security ETF, for example, debuted in November 2014, weeks before a high-profile cyber breach of Sony Pictures helped vault security companies such as FireEye sharply higher.
Still, the coming launch of ETFs that allow traders to wager on the decline of brick-and-mortar retailers is a sign of one-way sentiment if ever there was one. Jared Dillian, a former ETF trader who now publishes a financial newsletter, wrote this week that the bearish retail ETF filings are one of few signals that “maybe it is time to put on your distressed hat and look around some of these names for value.”
In other words, retail bears might want to brace for the scenario, however unlikely, that the debut of bearish retail ETFs could signal that the beaten-down industry is due to rebound.
