Tough Times For Retail ETFs

by on December 3, 2009 | ETFs Mentioned:

A critical five-week stretch for retailers has gotten off to a slow start, and news that November sales results missed analyst expectations have added further weight to an already sagging sector. Retail sales reports from the Black Friday weekend have done little to inspire confidence, and now many retailers are reporting that they came up short on analysts “muted expectations” for last month.

Black Friday ShoppersThe retail industry reported a 0.5% increase in November, far better than last year’s 7.8% drop but well below the 2.1% growth projected by analysts polled by Thomson Reuters. Abercrombie & Fitch and Children’s Place Retail Stores reported November slides of 17% and 13%, coming in far below analyst expectations and sending shares tumbling in recent sessions.

Not all news was bad: department store Kohl’s beat expectations by reporting a 3.3% increase in same-store sales in November. But Macy’s and J.C. Penney both fell short of estimates. Target also failed to meet expectations, reporting a 1.5% decline primarily attributable to weak sales in the first three weeks of the month.

Retail store results will be monitored very closely this month, as investors look for some indication that consumers have begun to loosen their pursestrings. While early results are good, the full impact of a still-rising unemployment rate remain to be seen. On a seasonally-adjusted basis, unemployment in the U.S. was 10.2% in October 2009, having more than doubled in the last 18 months. Last October, unemployment was 6.6%, and the U.S. had one of the worst holiday shopping seasons ever. With millions more now out of work, it’s difficult to imagine retailers delivering improved results this year.

According to the National Retail Federation, shoppers spent 7.9% less over the 2009 Black Friday weekend than they did in 2008, setting the stage for another disappointing end to the year.

ETF Plays In The Retail Sector

The retail sector should be extremely active in December, as investors try to interpret just how the latest news and trends will translate to the bottom line. For investors looking to make a play on this sector (either long or short), there are a number of ETF options. For more actionable investment ideas, sign up for our free ETF newsletter.

  • Merrill Lynch HOLDRS Retail (RTH): Like most HOLDRS products, RTH is has a relatively high concentration in a few stocks, including Wal-Mart (21%), Home Depot (12%), and (11%). RTH has been a strong performer so fat in 2009, gaining more than 25%.


  • PowerShares Dynamic Retail (PMR): This ETF is based on one of the “intelligent” Intellidex benchmarks that are linked to several PowerShares funds. PMR spreads its holdings across 30 different stocks, including both brick-and-mortar outlets such Target and Gap and online retailers like eBay and Amazon. PMR is also up about 25% on the year, although it has recently retreaded from year-to-date highs.


  • SPDR S&P Retail ETF (XRT): For investors looking for depth of exposure to the retail sector, XRT might be the best option. This ETF has about 65 holdings and is linked to an equal-weighted benchmark, meaning that it isn’t dominated by the largest companies in the space. XRT is also one of the cheapest options, with an expense ratio of just 35 basis points.


Disclosure: No positions at time of writing.