By Evie Liu 

Despite supply-chain strains and inflation pressures, the holiday season should see yet another retail sales record. The National Retail Federation forecasts that total retail sales will grow in November and December 8.5% to 10.5% from 2020, well above the 4.4% average increase over the past five years. This could give retail stocks a timely boost, especially e-commerce names that slipped this year as the economy reopened.

Traditional retail stocks surged as Covid-19 vaccines drove more consumers back into stores. The Solactive-ProShares Bricks and Mortar Retail Store Index, which tracks 40 retail companies that rely principally on in-store sales, gained 39% year to date, while the $S&P 500 index(.SPX.US)$ returned 24%.

Meanwhile, e-commerce names have sagged after the big gains of 2020 driven by the "everything goes online" frenzy of the pandemic. Many of the stocks became too pricey to sustain growth. The ProShares Online Retail Index, which tracks 40 leading e-commerce stocks around the globe, tumbled 30% from its February peak and is off 12% year to date.

Still, over the long term, e-commerce growth isn't about to stall. Online shopping made up 13% of total retail sales in the second quarter of 2021, according to the U.S. Census Bureau. Market research company eMarketer forecasts that the penetration rate could reach 24% by 2025.

Online retailers have historically traded at higher multiples than their bricks-and-mortar peers, but the premium has recently fallen. The group now looks much more attractive than a year ago, creating a buying opportunity. Strong sales during the holiday season could be the much-needed catalyst for the stocks, which investors can access through a few exchange-traded funds.

For instance, the $784 million $Proshares Online Retail Etf(ONLN.US)$ tracks the ProShares Online Retail Index and weights its holdings by market capitalizations, although a stock can make up no more than 25% of the portfolio when it rebalances. Currently, its largest holding is $Amazon(AMZN.US)$ with a 26% weight. Chinese e-commerce giant $Alibaba(BABA.US)$, despite having lost half of its market value over the past year, accounts for 10%, the fund's second-largest allocation. The fund is highly concentrated, so investors who already own Amazon shares should watch for overlaps.

The $825 million $Amplify Online Retail ETF(IBUY.US)$ reaches further down the market-cap ladder and holds about 80 e-commerce firms. The fund weights its holdings equally, which means it tilts more toward smaller-cap names compared with the Amazon-dominated ProShares ETF. Currently, its top holdings include $Newegg Commerce(NEGG.US)$, a small online retailer focusing on computer hardware and consumer electronics, and $Etsy Inc(ETSY.US)$, the seller of handmade items and craft supplies. The fund is more diversified and can spread risks among many holdings.

The $195 million $Global X E-Commerce Etf(EBIZ.US)$ is somewhere in between. It weights holdings by market cap, but with restrictive caps: No stock can make up more than 4% of the portfolio when it rebalances. Current top holdings include Etsy and $Williams-Sonoma(WSM.US)$, which sells kitchenwares and home furnishings. The Global X ETF stands out for its larger international exposure: 44% of its assets are invested in non-U.S. stocks, compared with the other two ETFs' 25%. The Global X fund is the youngest of the three but has been less volatile, meaning smaller gains but reduced losses.

The three ETFs have declined 14%, 11%, and 4% year to date, respectively, and now trade at similar multiples of 27 to 29 times forward earnings. With the Russell 2000 index recently pulling back, the small-cap-focused Amplify ETF might be best positioned to see a strong rebound.