How To Profit From The Amazon-Whole Foods Deal Before It Happens

Matt Thalman - Contributor - ETFs

The announcement that Inc. (NASDAQ:AMZN) had made an offer to purchase Whole Foods Market Inc. (NASDAQ:WFM) sent the grocery stocks plummeting. While some experts think Amazon's move into the grocery business is a great idea, others aren’t so sold on the idea.

Regardless of whether this move by Amazon is good or bad for Amazon, the grocery sector was punished by this news and I don’t think stocks like The Kroger Co. (NYSE:KR) deserved to fall nearly 10% on the news. Or even Wal-Mart Stores Inc. (NYSE:WMT), Target Corporation (NYSE:TGT), Costco Wholesale Corporation (NASDAQ:COST) all losing billions in market capitalization just because Amazon is buying Whole Foods.


While I am not saying that if Amazon does buy Whole Foods, it won't affect these grocery stores at all, but first off this isn't even a done deal. Secondly, we have no clue what Amazon plans to do with Whole Foods, so therefore we have no idea if the other companies would really be all that affected by this change.

Finally, if we look at the customer base Whole Foods attracted, and compare that customer to those of Kroger's, Walmart, Target, or even Costco for that matter; these customers don’t look a whole lot alike. Whole Foods did a lot of research before entering a market, income levels, education levels, the number of children, are just a few of the items Whole Foods looked at before opening a store.

If you look at Amazon's demographics, income levels, education levels are two that also pop up. A recent report indicated that Amazon Prime membership had reached 80% in the high income, high education level categories. If Amazon buys Whole Foods, it's essentially buying a competitor to itself, more so than buying a grocery store so it can compete with the likes of Walmart when we look at it in terms of who is the true customer.

With that being said, Amazon will certainly have a better chance to compete with Walmart and the other grocery stores if it does buy Whole Foods and that is what it plans to do. But that true competition comparison isn't going to actually happen for a few years at best, since it will take time for the deal to actually go through approval and all that and then changes would need to be made at actual Whole Foods stores. Therefore avoiding the grocery sector for a few years just because Amazon may or may not rule the industry in 5 years is a little unnecessary.

So, in the meantime, buying a few Exchange Traded Funds that have exposure to the grocery stores and retailers that were hurt by the Amazon-Whole Foods merger announcement is one way you can profit from this deal before it has even happened. Let's take a look at a few of the ETF's I would start with if I were to employ this strategy.

The first would definitely be the VanEck Vectors Retail ETF (PACF:RTH). This ETF tracks a market cap weighted index of the 25 largest U.S. listed companies which derive the bulk of their revenue from retail. Companies like Amazon, The Home Depot, Lowe's, TJX Companies and are all part of the top ten holdings of RTH. The rest of the top ten are rounded out with Walmart, Costco, Target, Walgreens, and CVS; all stocks that got hit due to the Amazon-Whole Foods merger. Lastly, did I mention Kroger was also a large holding in RTH? This is the ETF that will give you the most exposure to grocers as the market realizes they made a mistake by selling off the industry.

The next ETF I would like to highlight is the PowerShares Dynamic Retail Portfolio (PACF:PMR). Kroger, Walmart, Costco, Walgreens, CVS, and Whole Foods all make up large positions in PMR. The ETF also holds retailers like BestBuy, Ulta Beauty, and Ross Stores. The Fund has been around since 2005 and had an expense ratio of 0.63%.

And finally I would like to highlight the First Trust NASDAQ Retail ETF (PACF:FTXD.IV). This ETF tracks a liquidity-selected index of 50 U.S. retailers. Walmart, Costco, Target, Walgreens, and Whole Foods are all positions within the ETF and Walmart is the funds largest holding, representing 8.37% of the ETF.

Now before you run off and buy any of the ETF's mentioned above or another one that has large holdings in the grocery stocks, remember that Amazon could completely wipe out this industry in a few years, the same way it has with book stores and the Macy's, Sear's, and J. C. Penny's of the world. So with that in mind, know that there is money to be made with this strategy, but this is an investment you will need to watch and keep a close eye on. Within the next year or so, most of the grocery stock will likely recover from the Amazon-Whole Foods decline which is when you take some profits.

Matt Thalman Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor held long positions in, The Home Depot, and Kroger at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

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