With the holidays quickly approaching, the retail sector of the U.S. economy is gearing up for a short stretch that could make or break profitability forecasts and the mid-term outlook for companies that have exhibited surprising strength over the past 12 months. Retailers are already preparing for blow-out sales, Black Friday mania, and the oncoming slew of Christmas shoppers. Investors are focused on the retail sector this time of year as many companies generate significant portions of annual revenues and profit during the holiday months of November and December. Last year’s holiday season saw sales skyrocket more than 5% in comparison to 2010. Unfortunately, projections for this year’s season aren’t as cheery and can be sufficiently summed up as being average [see also Gold And Silver In A Correlation Bubble?].
The National Retail Federation estimates that sales in the months of November and December will increase a moderate 2.8%. So it looks as if 2011 is proving to be a difficult year for retailers and investors alike; market turmoil, rising gas and food prices, low consumer sentiment, and continuing concerns over the health of the economy have all significantly impacted how consumers choose to spend their discretionary income [see our Simple (But Effective) Safe Haven ETFdb Portfolio].
Although retail sales will not quite reach the high benchmark set by last year’s season, there are some bright spots seen in particular sectors of the retail market. Research shows that clothing and accessories merchandise will be hot-ticket items while electronics and appliances demand is expected to decrease. With the growing trend of online shopping, retailers like Amazon are projecting a continuing increase in year-end sales. FedEx has also reported that the company expects delivery of packages to increase 12% this holiday season, which gives further proof of the accelerating online shopping trend.
Innovation in the exchange-traded fund industry has led to the creation of various products geared towards gaining exposure to the retail sector, allowing investors to capture the performance of this year’s holiday shopping season. November has already begun and its time for investors to get into the holiday spirit and start shopping for those retail ETFs [see also Examining “Dynamic” ETFs].
Retail ETFs Under The Microscope
With the holiday shopping season approaching, retail ETFs can be expected to see an increase in interest. If sales and earnings prove to be strong, these funds could get a nice boost. If investor anxiety and recent market turbulence causes consumers to cut back, retail funds could be dealt another blow to close out a wild ride in 2011.
Last year saw a solid finish for retail ETFs, with the three products profiled below jumping between 8% and 12% in the final two months. By comparison, the S&P 500 SPDR (SPY) tacked on about 6.7% in the final two months of 2011. Below, we profile three ETFs that offer exposure to the retail sector, including an equal-weighted product from State Street, a “dynamic” ETF from PowerShares, and a quirky HOLDRS that is scheduled for conversion to a more traditional exchange-traded fund in coming weeks [see also Six Noteworthy ETF Innovations]:
|Expense Ratio||0.35%||0.60%||Flat Fee|
|# Of Holdings||96||31||18|
|% In Top 10||11.7%||45%||84.6%|
|Largest Holding (as of 11/10/11)||ARO (1.6%)||M (5.7%)||WMT (18.9%)|
|Nov./Dec. 2010 Performance||+11.4%||+9.5%||+8.0%|
SPDR S&P Retail ETF (XRT)
This ETF tracks the S&P Retail Select Industry index, an index that represents retail stocks listed on the NYSE, AMEX, and NASDAQ. This ETF is linked to a modified equal weighted index, a methodology that gives approximately equivalent allocations to each of the 96 holdings.
While XRT focuses exclusively on retail companies, it spreads its portfolio across various corners of this market. About 30% of the fund is invested in apparel retail with the largest holding being the popular clothing retailer Aeropostale. Other segments of the retail market represented include specialty stores, automotive retail, department stores, computer and electronics retail, and food retail. About 5% of XRT’s assets are in Internet retail companies [see also How ETF Investors Can Save $415 Million (Without Breaking A Sweat)].
PowerShares Dynamic Retail Portfolio (PMR)
This ETF is based on the Dynamic Retail Intellidex Index, which seeks to capture the performance of stocks of U.S. retail companies. PMR is part of the suite of ETFs linked to “intelligent” benchmarks that choose components based on a quant-based methodology that analyzes growth, valuation, and risk metrics.
PMR also maintains a balanced portfolio, but is not quite as deep as PMR; there are about 30 stocks in the underlying index. PMR does maintain significant exposure to small cap companies, allocating about 40% of assets to this segment. Holiday retail giant Macy’s Inc., accounts for 5.7% of the fund’s total assets, making it the largest holding. In 2010, PMR gained 8.5% during the holiday season [see also Not All Mid Cap ETFs Are Created Equal].
Retail HOLDRS (RTH)
Although RTH is not technically an ETF, it does offer exposure to a basket of securities in the U.S. retail industry. The fund has a shallow portfolio comprised of less than 20 securities with their top three holdings accounting for more than 40% of the total assets. RTH does, however, offer a significant amount of exposure to online retail behemoth, Amazon, Inc.. Last year, RTH had a strong performance during the months of November and December, gaining about 8%. It is important to note that this product is scheduled to be converted to a traditional ETF linked to the Market Vectors US Listed Retail 25 Index in the fourth quarter of the year [see also HOLDRS Conversion Begins: Investor Action Required].
Disclosure: No positions at time of writing.