Black Friday Shines Spotlight on Retail ETFs

For many, Black Friday marks the unofficial start to the “make-or-break" period, as lots of retailers rely on generating a significant portion of their annual revenues during the months of November and December alone. This year is no different.

Before we move onto discussing ways to play the retail industry today, let’s recap how some of the industry bellwethers are doing:

• Wal-Mart (WMT) has been in the limelight since May of this year, since the company has failed to beat quarterly earnings estimates in light of declining sales. Most recently, the brick-and-mortar juggernaut saw its shares plunge after it issued a warning that a strong dollar and wage increases for workers would hurt 2016 profits.

• Macy’s (M) stock dropped sharply after recently missing Q3 earnings estimates; the retailer cited a slowdown in international tourists and warmer weather as some of the reasons behind the slowdown in sales.

• Target (TGT) posted solid results that met expectations last week, although the stock hasn’t rallied much since. The retailer was optimistic about the holiday season, as well as ramping up their online sales efforts.

• Amazon.com (AMZN) had a blockbuster quarter last month and the stock has gone onto charge higher into uncharted territory ever since. Interestingly enough, while other retailers were talking up “online sales” as they play catch-up to their dotcom rival, Amazon cited cloud computing as their fastest growing division.

All in all, the most recent corporate earnings showcased the ever-intensifying battle between traditional brick-and-mortar retailers and Amazon.

Investors would be wise to consider how much a particular ETF affords to Amazon.com (AMZN) stock – you can use the ETFdb stock exposure tool to check — before pulling the trigger on their retail play. Why? Consider the fact that the best performing Retail ETF is up 8% YTD, while the worst is down 7%. Now consider a head-to-head comparison between the top 10 holdings of these funds, Market Vectors Retail ETF (RTH B+) and the SPDR S&P Retail ETF (XRT A): .

Notice the different weights afford to AMZN? The top holding in RTH, Amazon, is the key as to why this fund has grossly outperformed XRT, it’s a much (much) bigger retail ETF counterpart in terms of AUM.

Because XRT is equally weighted, AMZN stock does not have as meaningful impact on the ETF’s performance. Amazon is the second best performing stock this year (second to NFLX with an impressive 156% YTD gain) managing to rake in gains of 118% YTD.

The ultimate takeaway here is that the Amazon stock has been a big driver behind some ETFs, and not others, given the difference in product methodologies. Investors who have a strong opinion on this name, either bullish or bearish, may wish to opt for an ETF that reflects this — that is, choosing a fund that allocates either a high or low percentage of its assets to shares of AMZN.

See other ETF Head-to-Head Comparisons here.

Investors can also take a more broad-based approach when it comes to establishing exposure to the retail industry. One way to do this is via consumer discretionary ETFs – see here.

On the other hand, investors looking to opt for an Amazon-heavy ETF are bound to miss out on the following funds as they live under the Technology Equities category instead of Consumer Discretionary:

• DJ Internet Index Fund (FDN B+)
• Nasdaq Internet Portfolio (PNQI B)

If you’re looking to make an ETF trade inspired around the holiday shopping season, be sure to look under the hood and make sure you’re comfortable with the funds’ underlying holdings. Upon first glance, the well-known XRT appears like the “best fit” name for accessing retailers. However, a closer look reveals that it lacks a big weighting to Amazon.com, which has proven to be a costly nuance in light of the online retailer’s strong performance.

Follow me @SBojinov