Retail ETFs Sink On Disappointing Job Report

by on June 4, 2010 | ETFs Mentioned:

With markets sinking as of late due to ongoing trouble in Europe, many investors have set their sights on May’s jobs report to see how the American economy compares to its beleaguered counterparts across the Atlantic. With the spotlight on Europe in recent weeks, a number of encouraging data releases have seemingly indicated that the U.S. economy remains on the right track (see UNG’s Stellar May: Proof Of A U.S. Recovery). But the numbers released on Friday morning were pretty disappointing when census workers were factored out of the equation, calling into question just how deep any recovery could be in the near future.

According to the Labor Department, payrolls shot higher by 431,000, but of that number 411,000 were census workers, leaving just a small fraction to be hired by private employers. The number on non-census jobs was down sharply from the 218,000 private sector jobs that were created in April. Additionally, it appears as if long-term unemployment is becoming an increasingly large issue; the number of people out of work six months or longer reached 6.76 million in May, and made up 46% of all unemployed. Wall Street had much loftier expectations for Friday’s report–a payroll increase of 513,000 was anticipated–so the shortfall sent markets tumbling in morning trading; the Dow and S&P 500 were both off by more than 1.5%.

One sector that is likely to suffer the most from ongoing unemployment issues is the consumer discretionary segment of the market. These firms rely on consumers generating disposable income in order to come into their stores and buy goods, a tough task for out-of-work individuals. Not surprisingly, these firms were dropping more sharply than the overall market in early morning trading, with some ETFs in the consumer discretionary ETFdb Category posting losses of more than 2.5%. Below we highlight two of the sector’s ETFs that are reacting the worst to the news and could be among the most impacted by future unemployment numbers.

PowerShares S&P Small Cap Consumer Discretionary Portfolio (XLYS)

This ETF, which tracks the S&P 500 SmallCap 600 Consumer Discretionary Index, includes companies that are engaged in the businesses of providing consumer goods and services that are cyclical in nature, including retail, automotive, leisure and recreation, media and real estate. It holds 113 securities and offers good depth of holdings; less than 25% of assets are held in the top 10 holdings. In fact, its top two holdings, Tractor Supply and Live Nation Entertainment, combine to make up just 6% of the fund. In terms of market capitalization levels, XLYS stays true to its name and has 74.1% of its assets in small cap securities with 19.9% in micro caps. XLYS was down close to 3.1% in mid-morning trading, among the most negatively impacted by the disappointing jobs numbers (see more fundamentals of XLYS here).

SPDR S&P 500 Retail ETF (XRT)

XRT offers investors a diverse set of holdings by using an equal weighted methodology. As such, its top ten holdings make up just 18.4% of the total assets in the fund. The fund has a wide variety of market capitalization levels represented with roughly one-quarter of the assets going towards large and giant capitalization level companies, 50% to medium caps and the remainder to small. Some of its top holdings include well known names such as Netflix (2.1%) but also lesser known companies such as Casey’s General Stores (2%). XRT was down close to 2.6% in early morning trading, suggesting that the fund will be more hard hit than others on any other bearish employment figures (see more fundamentals of XRT here).

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Disclosure: No positions at time of writing.