Judgment Day For Retail ETFs

by on November 25, 2010 | ETFs Mentioned:

So much for a nice, quiet Thanksgiving week. Between the back-and-forth negotiations surrounding a bailout of Ireland and yet another escalation of tensions between North and South Korea, recent sessions have featured no shortage of action. Now investors turn their attention to the U.S. consumer, preparing to analyze spending habits during the make-it-or-break-it shopping season. 

According to the National Retail Federation, the weeks between Thanksgiving and Christmas accounted for more than 19% of total sales last year. For some companies, the holiday season can account for between 25% and 40% of annual sales, highlighting the importance of the next few weeks for the retail corner of the economy. Not surprisingly, the 2010 version of the holiday shopping season has seen a continued push via an aggressive marketing campaign. Many stores have announced that they will open earlier than in previous years, while some–including Toys R Us–are actually planning to begin offering “Black Friday” deals on Thursday night. Based on some estimates, nearly 140 million shoppers–almost 45% of the U.S. population–are expected to be hit the stores on Friday.

After plummeting in 2008 amidst a deep recession, retail stores made a mild recovery last year. FTI Consulting recently released a report projecting that U.S. retail sales will jump another 3% this year compared to 2009 results, with the increase primarily attributable to increased household wealth and a continued surge in online purchases. Recent results for the retail sector have been encouraging; Target recently reported that third quarter earnings rose a better-than-expected 23%, following upbeat reports from Wal-Mart and Home Depot [read Be Careful What You Wish For: Rising Yuan Could Hurt Retail ETFs].

But there are some reasons to be cautious heading into the holiday rush as well. A recent survey of economists revealed that many expect high unemployment to play a major factor in another weak holiday season, while polls in some major metropolitan areas give further reason to be pessimistic. Uncertainty over the tax environment heading into next year may cause wealthier households to hold back a bit on the gift-buying, while general uncertainty in Europe and Asia has pummeled markets in recent sessions and threatens to impose considerable headwinds throughout the rest of the year [read Korea ETFs Plummet As North/South Tensions Flare].

Retail ETFs In Focus

As the post-Thanksgiving shopping craze prepares to kick into high gear, the retail sector figures to be extremely active as early results from Black Friday and Cyber Monday begin to trickle in. Below, we profile ETFs that figure to be under the microscope in coming weeks, including three that offer investors access to the traditional retail sector and one for the next generation of holiday shopping [for more ETF ideas, sign up for our free ETF newsletter]

  • SPDR S&P Retail ETF (XRT): This ETF offers concentrated exposure to traditional brick-and-mortar retail giants, spreading exposure across about 65 individual holdings. The index underlying XRY is equal-weighted, meaning that this fund isn’t concentrated in a handful of mega cap companies (no one stock makes up more than 2% of total assets). XRT is actually quite light on large cap companies; small caps (30%) and mid caps (47%) make up the majority of underlying holdings.
  • Retail HOLDRS (RTH): This Merrill Lynch product also offers exposure to the retail sector, but is very different from the State Street ETF highlighted above. Like most HOLDRS, RTH exhibits a high degree of concentration; there are 18 total holdings, and the top ten account for more than 80% of total exposure. In addition to big weightings to Wal-Mart (19%) and Home Depot (13%), this fund also has a major allocation to online giant Amazon.com, which accounts for about 11% of holdings. RTH’s holdings are almost exclusively large cap and mega cap stocks; mid and small caps make up only about 5% of the fund [see Five Surprising Facts About HOLDRS].
  • PowerShares Dynamic Retail (PMR): This ETF is part of the PowerShares lineup of “intelligent” ETFs linked to benchmarks that utilize quantitative analysis in an attempt to outperform traditional cap-weighted indexes. PMR spreads its holdings across 30 different stocks, including approximately equal allocations to large caps, mid caps, and small caps. PMR charges an expense ratio of 0.60%, slightly higher than the 0.35% charged by XRT.
  • Internet HOLDRS (HHH): This fund may seem out of place on this list, but the heavy concentration of firms with operations focused around online shopping means that HHH will take its cues from holiday shopping patterns in coming weeks. Amazon.com is HHH’s largest single holding, accounting for a whopping 42% of assets. Beyond Amazon and eBay, which makes up another 18% of assets, there is minimal exposure to online retailers; other big allocations include Yahoo!, Priceline.com, Time Warner, and McAfee [see Why Amazon's Deal With Target Could Be Good News For HHH].

Disclosure: No positions at time of writing, photo is courtesy of Design by The Cimarron Group, copyright held by StudioCanal Image.