Sam Subramanian: At a time when continuing growth of the U. S. economy appears not so certain, investors often look to overweight industries that can continue to grow.
E-Commerce is an industry that fits the bill.
According to Forrester Research, U. S. e-commerce industry grew by 12.6% to $176 billion in 2010 and is expected to increase by 60% to $279 billion in 2015.
A combination of factors such as increasing use of the internet & mobile internet devices and rising value-consciousness of consumers is supporting e-commerce growth.
Major Segments of E-Commerce Industry
Companies in the e-commerce industry can be grouped under four broad segments, e-Retailing & e-Entertainment, Online Advertising, Online Travel & Related Services, and Online Payment Systems.
E-Retailing & E-Entertainment
High levels of unemployment and soaring gasoline prices are driving consumers to shop via the internet. Smartphones and tablet computers are the most popular items sold online, followed by consumer electronic goods like DVDs, e-Readers, e-Game devices. E-Retailers are offering free shipping to increase sales.
Major names in online retailing include Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). A recent development in Retail e-commerce space is online distribution of short-life discount coupons helping local shops drive sales. Groupon has filed an S-1 with SEC to proceed with an initial public offering.
In the entertainment space, an increasing number of consumers prefer to watch movies at home as Internet reliability and download speed improve. Companies like Netflix (NASDAQ:NFLX) that offer online movie rental services are capitalizing on this trend.
According to e-Marketer, U.S. online ad spend touched $26 billion in 2010. It is estimated to grow by 20% to $31.3 billion in 2011, driven by increasing usage of mobile internet devices and growing popularity of online social networks.
While search takes the major share, display ad spend is growing faster, helped by strong spends on video format and branding-oriented ads. Display ad is expected to overtake search by 2015.
Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT) are major players while ValueClick (NASDAQ:VCLK) is a small player in this segment. Social networking companies like Facebook and LinkedIn (NYSE:LNKD) are cashing in on rising online ad spend.
Large firms like Google and Microsoft have huge cash hoards to acquire smaller firms and this adds to the investment appeal of the e-commerce industry.
Online Travel & Related Services
Online purchases of airline tickets and reservations of hotel rooms are gaining in popularity. Rapid growth of the economies of Brazil, China, India, Russia and South Korea is spurring international travel to these nations. The Commerce Department estimates international travel to increase by 6% to 8% from 2010 to 2016.
Online travel and related services companies like Expedia (NASDAQ:EXPE) and priceline.com (NASDAQ:PCLN) stand to benefit from the increase in international travel.
Online Payment Systems
Despite the convenience of existing online payment systems like eBay’s Paypal, consumers are concerned with security of the internet for online transactions. Such concerns are providing growth opportunities for other players. Google has recently developed an online payment system that allows customers to make payments online simply by waving their mobile phone over the point-of-sales terminal. Google says that this online payment system does not record any personal information of the customer.
How Can You Profit From E-Commerce Industry Growth?
Investors seeking to profit from of the e-commerce industry’s growth prospects can invest in shares of the companies mentioned above. This option exposes them to company-specific risk. Investors can diversify and reduce the company-specific risk by investing in bundled products such as sector ETFs. to profit from the e-commerce theme. Here are some examples.
E-Commerce ETF Examples
First Trust DJ Internet Index ETF, (NYSE:FDN) – ETF that invests in companies included in the Dow Jones Internet Composite Index
Global X China Technology ETF, (NYSE:CHIB) – ETF that invests in companies included in the Selective China Technology TR Index
Guggenheim China Technology, (NYSE:CQQQ) – ETFs that invests in companies included in AlphaShares China Technology Index
Internet HOLDRs, (AMEX:HHH) – Exchange traded portfolio that includes select U.S. e-commerce companies
PowerShares NASDAQ Internet, (NASDAQ:PNQI) – ETF that invests in companies included in the NASDAQ Internet Index
As is often the case with any sector ETF, one has to seize the right time for investing to realize outstanding returns from ETFs investing in the e-commerce theme.
Dr. Sam Subramanian is Managing Principal and Chief Investment Officer of AlphaProfit Investments, LLC. He edits and publishes the AlphaProfit Sector Investors’ Newsletter™. The AlphaProfit Sector Investors’ Newsletter has received the distinction of getting ranked #1 by Hulbert Financial Digest several times. He also edits the AlphaProfit’s popular investing blog and e-letter MoneyMatters.