Photographer: David Williams/Bloomberg

Amazon Believers Double Their Pleasure in Wagers Against Retail

  • Investors short retail ETF, buy Amazon shares, and wait
  • Most liquid retail industry ETFs are ideal shorting vehicles

Call it the Amazon double-dip.

Investors who think Amazon.com Inc. is about to destroy the retail industry as we know it have figured out a way to supercharge that bet -- by buying the online giant’s stock and pairing it with a short position in the SPDR S&P Retail ETF, symbol XRT, a foundering fund that primarily holds bricks-and-mortar stores.

“If you are long Amazon, wouldn’t it make sense to be short the stocks Amazon will look to decimate?” said Ihor Dusaniwsky, head of research for S3 Partners LLC. “It’s going long the ‘best of the breed’ and shorting the ‘worst of the breed.’”

Traders are building up short positions in anticipation of XRT dropping to $40 or $41, Dusaniwsky said. The fund, which is down more than 5 percent this year, closed at $41.74 on Tuesday. XRT’s top holdings include furniture stores, supermarkets and groceries, electronics chains and media streaming, all areas where Amazon is spending heavily, Dusaniwsky said.

“If Amazon succeeds, it will be at the expense of companies like Wayfair, Sprouts Farmers Market, Whole Foods, Best Buy and Netflix,” Dusaniwsky said. These five companies make up around 7 percent of XRT, which also holds $3.37 million of Amazon stock, making it 1.2 percent to the portfolio, according to data compiled by Bloomberg.

Shorting Vehicles

So far Amazon is holding up its end of the bet. The world’s largest online retailer beat profit and revenue estimates in the first quarter and said sales may top projections in second quarter, according to an April 27 statement. The stock’s up 28 percent this year, as the company continues to add subscribers to its $99-a-year Prime program, locking in loyalty and building a moat against competitors.

XRT’s short interest peaked in early February, hitting a high for the year of $1.67 billion on Feb. 2, according to a research report by S3 Partners on May 8. But as the price sank to a year-to-date low of $40.82 on April 5, short sellers covered nearly half of their positions and locked in profits, the report noted.

Sector ETFs like XRT can be popular shorting vehicles, but only a fraction are suitable for it, according to Sebastian Mercado, ETF strategist at Deutsche Bank AG. Most ETFs are too costly to borrow against or have inadequate liquidity on the short side, he said. The ones that work typically are the most liquid in their industry group, have short interest that’s a double-digit percentage of shares outstanding and have an active options market, he said.

Mercado pointed to funds like the SPDR S&P Homebuilders ETF, symbol XHB, and the VanEck Vectors Oil Services ETF, which goes by OIH, as good candidates for shorts.

“These are your shorting vehicles,” said Mercado, who includes XRT on the list. “Shorting anything else is pretty much financial suicide.”

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