A Comprehensive Guide to Retail ETFs - ETF News And Commentary


As a pioneer in retail business, the United States provides ample growth opportunities for all types of retail companies. The retail industry covers everything in its scope, ranging from internet catalog sales, auto dealers, convenience stores, vending machines and clothing; thus dividing retailers into numerous categories. Retailers of all sizes, including individual direct marketers or direct sellers, small- to medium-sized franchise unit owners, and large "big-box" store operators compete in the U.S.

From growth perspective, the retail sector is among the leading U.S. industries and employs an enormous workforce. Retailers nowadays are largely concentrating on satisfying customers and enriching their buying experience through new strategies as consumers have become more knowledgeable, inquisitive and choosy. The latest retail strategies include focusing on Omni-channel retailing, providing personalized in-store experience, adopting mobile wallet apps, reinventing loyalty programs and investing in data analysis to track shoppers. (Read: Weak Earnings Hurting Retail ETFs?)

Retail is no different from other U.S. industries and is highly dependent on the economy to prosper. Such heightened economic dependence and factors like job growth and interest rates indicate that a speedy economic recovery is vital to the retail industry's health.

Although the U.S. economy commenced the year on a sluggish note, the stock markets have shown momentum so far. The S&P 500 has gained roughly 7.5%, the Nasdaq Composite Index jumped about 7.7%, while the Dow Jones Industrial Average rose 2.7% year-to-date.

The economic outlook for 2014 is positive based on favorable economic data and an improved consumer and business outlook. (Read: 5 Inverse ETFs for a Shaky Market )

According to the data from Bureau of Labor Statistics the unemployment rate for June has declined to 6.1% from 6.3% in May, and reached its lowest level since Sep 2008.

A recent data from the Conference Board on Consumer Confidence Index reflected a 3.0 points improvement to 85.2 in Jun 2014, following a rise in May to 82.2. Meanwhile, the University of Michigan's Consumer Sentiment survey showed a 0.7% sequential improvement to 82.5. However, it declined 1.9% year-over-year. (Read:

Another data by the Commerce Department shows that consumer spending for May 2014 was up 0.2% after being flat in Apr 2014. Despite growth in personal income during May, spending remained cautious. Looking ahead, the Federal Reserve has been projecting stronger growth as it winds down its bond-buying program designed to stimulate the economy. (Read: 4 Ways to play Earnings Growth with ETFs )

With economic activities gradually gaining traction, the Federal Reserve has so far reduced its monthly bond purchases to $35 billion, in 5 rounds of $10 billion tapering each month. The minutes of the latest Federal Reserve meeting indicate that it will likely reduce the pace of asset purchases in further measured steps. Federal Open Market Committee (FOMC) now plans to end its bond purchase program in October with a final reduction of $15 billion provided the economy stays on track. Till that time, the Federal Reserve plans to trim its bond purchases by $10 billion at each meeting.

However, the central bank said the decision to end bond purchases in October shouldn't be interpreted as a sign that hike in key interest rates is likely to begin sooner. The central bank plans to keep the rates near zero for a considerable period.

The strengthening manufacturing sector and improving labor market are positive indicators no doubt, and the retail sector is likely to hog all attention. These feel-good factors have abated fears of a derailed economy that rose after the first quarter of 2014, when GDP data revealed a 2.9% decline. Going forward, market analysts continue to suggest about 3% economic growth (GDP) in 2014.

Playing the Sector through ETFs

ETFs present a low-cost and convenient way to get a diversified exposure to this sector. Below we have highlighted a few ETFs tracking the industry:

SPDR S&P Retail ( XRT ):

Launched in Jun 2006, SPDR S&P Retail (XRT) is an ETF that seeks investment results corresponding to the S&P Retail Select Industry Index. This fund consists of 102 stocks, with the top holdings being SUPERVALU Inc. (SVU), PetSmart Inc. (PETM) and Lithia Motors Inc. (LAD), representing asset allocation of 1.22%, 1.20% and 1.18%, respectively, as of Jul 29, 2014. The fund's expense ratio is 0.35%, while the dividend yield is 0.74%. XRT has AUM of $534.7 million as of Jul 29, 2014.

Market Vectors Retail ETF ( RTH ):

Initiated in Dec 2011, Market Vectors Retail ETF (RTH) tracks the performance of Market Vectors US Listed Retail 25 Index. The fund comprises 26 stocks with the top holdings being Wal-Mart Stores Inc. (WMT), Amazon.com Inc. (AMZN), and CVS Caremark Corp. (CVS), representing asset allocation of 10.70%, 9.31% and 7.58%, respectively, as of Jul 31, 2014. The fund's expense ratio is 0.35% and dividend yield is 1.02%. RTH has managed to attract $61.3 million in assets under management till Jul 30, 2014.

PowerShares Dynamic Retail ( PMR ):

PowerShares Dynamic Retail (PMR), launched in Oct 2005, follows Dynamic Retail Intellidex Index and is made up of 29 stocks that are primarily engaged in operating general merchandise stores such as department stores, discount stores, warehouse clubs and superstores. The fund's top holdings are The Kroger Co. (KR), Costco Wholesale Corp. (COST) and O'Reilly Automotive Inc. (ORLY), reflecting asset allocation of 5.48%, 5.34% and 5.29%, respectively, as of Jul 29, 2014. The fund's expense ratio is 0.63%, while the dividend yield is 1.09%. PMR has managed to attract $21.7 million in assets under management as of Jul 30, 2013.

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SPDR-SP RET ETF (XRT): ETF Research Reports

MKT VEC-RETAIL (RTH): ETF Research Reports

PWRSH-DYN RETL (PMR): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: GDP , XRT , SVU , PETM , LAD



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