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Investor Alert

Oct. 30, 2021, 10:34 a.m. EDT

How to build your own ETF and avoid thousands of dollars in management fees

By Michael Brush

Exchange traded funds are one of the best inventions for investors since the stock market itself. But they have one little problem.

Those pesky fees. They add up.

Popular sector ETFs like the iShares Expanded Tech Sector ETF  (PSE:IGM) , the Invesco S&P 500 Equal Weight Tech  (PSE:RYT) or the KraneShares CSI China Internet ETF (PSE:KWEB) charge anywhere from 0.4% to 0.7%.

Put $100,000 into them and earn 8% a year over 15 years, and you’ll have $317,000, before fees. That ETF bite? You’d give up over $15,000. This assumes 0.55% fees.

That’s a lot of money. But there’s a hack for this: Buy and hold stocks on your own to build a homemade ETF. Heck, now that brokerages including Robinhood (NAS:HOOD) and Charles Schwab (NYS:SCHW) offer commission-fee trading and partial-share purchases, you can build your own S&P 500 ETF (PSE:SPY) .

Read: Preview for Amazon earnings Oct. 28: With hundreds of thousands of job openings, labor will be in focus

To keep things simple, it’s better to build ETFs that target promising sectors with far fewer stocks. The key is to choose the right sector. You want one that benefits from a long-term secular trend. My choice? Internet shopping.

Sure, by now a lot of people shop online. But there’s plenty more people to convert. Bank of America estimates global ecommerce will hit 24% of retail sales in three years, from 19% now.

“Ecommerce remains a top secular growth industry,” says the bank.

“Global” is key here. That’s because different regions have different adoption rates. Online shopping is more popular in many parts of Asia. The potential market size is bigger. In Latin America, adoption is still pretty low at 9.6% of retail sales, says Bank of America, compared to 27% in Asia and 18% in the U.S.

Latin America has a lot of catching up to do. In many emerging markets, ecommerce share is still in the single digits in areas like beauty, household goods and pet care. Your online shopping ETF has to get a piece of this catch-up growth. Mine has you covered.

I’m going with eight stocks suggested in a recent Bank of America note on global shopping trends. The bank actually suggests waiting till the first quarter to buy because of possible holiday season volatility caused by supply chain issues and labor shortages.

I think it makes sense to begin buying now, and add on any weakness. After all, the sector already seems discounted. It recently traded at an enterprise value (net debt plus market capitalization) of 4.1 times forward sales, compared to 5.4 times last year, and a five-year average of 4.3.

To average in, I always try to plan entries with at least three to five purchases. Consider my custom ETF a substitute for ProShares Online Retail ETF  (PSE:ONLN) , which charges 0.58%.

Before we get to the eight names, here is one more advantage to do-it-yourself ETFs. They’re superior to mutual funds not only for the fee savings, but because you choose when to take capital gains.

But wait, is this really an “ETF” with just eight stocks? I say yes, because they are carefully selected to give you a global reach into various subsegments of ecommerce, from appliances and apparel, to luxury goods, gaming and financial services. But it’s even better because it avoids the “diworsification” that comes with owning 50 stocks in a sector.

Amazon.com

Given its huge presence in cloud services with AWS, Amazon.com (NAS:AMZN) is no online shopping pure play. But it is so good at this, it now has 41% of U.S. ecommerce, says Bank of America. So it’s a must-own in your online shopping ETF. Increasing product reach and even faster shipping times should boost growth next year, says Bank of America analyst Justin Post.

Coupang

Online shopping is super popular in Korea, and this company is the way to play the trend. Coupang (NYS:CPNG) is the largest ecommerce company there. It is also growing quickly in Japan. Korean ecommerce grew 19% a year from 2017-2020, and it is not slowing down. Ecommerce will account for 56% retail sales in 2025, up from 34% last year, says Bank of America analyst Susie Lee.

Farfetch

Farfetch (NYS:FTCH) is the biggest global player in online luxury goods, a hot sector. The sector will grow 15%-20% a year through 2025, believes Bank of America analyst Geoffroy de Mendez. Farfetch is well-positioned with its marketplace model, which means more products and limited inventory risk. These advantages have helped Farfetch grow twice as fast as its sector in the past five years. Bank of America projects 30%-35% annual sales growth over the next several years. Partnerships with Alibaba (NYS:BABA) and Compagnie Financiere Richemont Unsponsored Switzerland (OTC:CFRUY) open doors to China.

JD.Com

The largest retailer in China by revenue, JD.com (NAS:JD) has nearly a half a billion active customer accounts. It benefits from a partnership with Tencent (OTC:TCEHY) . This gives the retailer access to Tencent’s huge user base in online games and mobile apps Weixin and WeChat. JD.com also has a partnership with Walmart. The company will post above-average growth because it continues to win over so many users and merchants, says Bank of America analyst Eddie Leung.

MercadoLibre

In Latin America, ecommerce penetration is low. The region has plenty of room to catch up. There is no reason it won’t. The growth in distribution centers, last-mile hubs and better shipping dock facilities supports the trend. MercadoLibre (NAS:MELI) , the largest online commerce platform in Latin America, continues to build out third-party drop-off and pick-up points to improve delivery. Same-day and next-day delivery has increased dramatically, says Bank of America analyst Robert Ford.

Sea

Sea (NYS:SE) offers its ecommerce platform Shopee throughout much of Asia, and in Brazil and in Mexico. It also operates Garena, a global game developer and publisher, and digital financial services under the SeaMoney brand. It has a dominant position in much of Asia, which suggests continued growth.

Walmart

Amazon.com dominates U.S. ecommerce, but the big brick-and-mortar retailers are investing heavily and catching up. Unlike Amazon.com, Walmart can leverage its national store footprint to support fulfilment. Its store base of nearly 5,000 locations gives it an edge in online grocery sales and delivery. About 90% of the U.S. population is within 10 miles of a Walmart, and 70% of Walmart stores offer same-day grocery delivery. This helps explain why Walmart is the top choice for online groceries. Because of its size, Walmart has an edge in the port congestion battle, and it can offer competitive prices.

Target

Target’s (NYS:TGT) ecommerce presence is small. But it has been working hard to build an online business, so now it’s growing at about 20% a year, says Bank of America analyst Robby Ohmes. Like Walmart, it can use its stores as fulfillment centers, and it’s making strides in same-day delivery. Target should fare relatively well this holiday season because its heft gives it better port access than competitors.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned HOOD, AMZN, CPNG, FTCH, BABA, MELI and SE. Brush has suggested HOOD, AMZN and BABA in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.

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