ETF of the Week: SPDR S&P Retail ETF, XRT

This ETF offers exposure to the U.S. retail industry, a targeted sub-sector of the consumer discretionary space that may appeal to investors looking to bet on increased consumer consumption in the domestic market. XRT is probably too targeted for any investor with a long-term buy-and-hold strategy but may have appeal for those looking to implement a sector rotation strategy or overweight high beta corners of the U.S. market.

As the economy is on a stronger pace towards being reopened and life returns to normal, once the downtrodden plays like the retail sector are bouncing back. XRT is up 16% on a 1-week return; and up 44% on a YTD return. In comparison, the S&P 500 is up 4.5% on a 1-week return and up 5.3% YTD. There are still relatively attractive valuations, despite recent run-up as well.

With a growing optimism for retail, vaccine efforts and fiscal/monetary stimulus are fueling bets of a return to economic growth. Retail is seen as a recovery play after the post-pandemic rebound left this sector in the dust for much of 2020. Hopefully, retail can capitalize on pent-up consumer demand. To stay competitive, many traditional retailers have enhanced their online presence and improve the eCommerce shopping experience during Covid.

Retail sales are expected to grow this year between 6.5% and 8.2%, amounting to more than $4.33 trillion in sales, the National Retail Federation said in its annual forecast. The U.S. economy is expected to see its fastest growth in more than two decades. While eCommerce grew due to the Covid pandemic and shut-in orders, traditional retail is still a large part of the economy. NRF forecasts eCommerce sales will grow between 18% and 23%, to between $1.14 trillion and $1.19 trillion in sales.

Additionally, as Americans become more comfortable traveling again and attending social gatherings, more money will be spent on services, which normally account for 70% of consumer spending. According to research from S&P Global Market Intelligence, foot traffic to malls was already improving late in the summer despite the pandemic, with outdoor malls faring best even then, according to research from S&P Global Market Intelligence.

Currently, GameStop GME makes up 14.7% of XRT’s holdings. GME shares are up 1,280% YTD, contributing to XRT’s gains this year. GameStop’s record-setting rally caused GME’s weight in XRT to climb to 20%, which is a far cry from the video game retailer’s original weight of around 1%. The retail ETF follows a modified equally weighted indexing methodology.

GameStop’s meteoric rise may be attributed to a Subgroup of the Reddit community called WallStreetBets that has effectively cornered a segment of the market in a bid to target outsized institutional-sized investors with a huge short position on the company. If enough people pile into a single stock, the prices rise rapidly. While this is normal for any security, GameStop also has a huge short interest or people betting on the stock’s fall. As GME’s price rises too quickly, short-sellers may be forced to buy back into the position to cover their losses – a short squeeze.

For more podcast episodes featuring Tom Lydon, visit our podcasts category.

This article originally appeared on ETFTrends.com.