As a pioneer in the retail business, the United States provides
ample retail growth opportunities for all types of retail sales.
Retailers of any 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. across a
variety of markets, giving the country one of the most diversified
retail sectors in the world
From a growth perspective, the retail industry ranks second
among all the U.S. industries, and provides enormous employment
opportunities. Annual sales turnover of the retail industry is more
than 12% of total trade volume of all the U.S.-based businesses.
Additionally, it accounts for over 11% of total employment in the
However, despite beginning the year on a strong note, sales
slowed during the calendar second quarter. A drop in consumer
spending was largely the culprit, although some analysts also
blamed strange weather and consumer confidence as well for the
Backdrop Still Weak
Uncertain and sluggish economic conditions continue to weigh
upon the retailers, indicating a grim outlook in terms of
profitability and hopes of more growth. However, a continuous
effort on their part to offer innovative products and value pricing
has been paying off in an economy which is still in the doldrums (
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Still, July's figures for retail sales came in relatively solid,
erasing memories of the three straight month decline that investors
saw in the second quarter period. Sales especially crushed
estimates on a retail sales less autos figure, which came in twice
Yet despite this rebound, job growth remains anemic and consumer
confidence isn't exactly high at this point in time. Given these
figures, it is still an uncertain trend in the retail market, a
poor situation to be in as we head into the crucial fourth quarter
for the sector.
Retail Trends for 2012
Beyond the uncertainly, there have been other trends in the
retail market so far this year. The retail industry expansion trend
that was witnessed in 2011 in terms of store openings seemed to
fade in 2012 with the announcement of triple-digit store closing
plans by leading retail chains.
The increased number of stores shuttered was mainly due to shift
in consumer preferences and change in retail shopping trends, while
it had little to do with any alteration in the industry
fundamentals. Another reason behind these increased store closures
by retailers is the growing demand for new shopping modes, namely
on the Internet and mobile phones (
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This has forced many to look to more transformative ways to keep
retail in the 21
century and not get stuck behind technological advances. In light
of this, the retail industry continues to reinvent, redesign and
revitalize its physical store formats and consider these essential
to maintain dominance.
Of late, retail giants including Best Buy Co. Inc., Target
Corp., J.C. Penney Co. Inc. (JCP) and Build-A-Bear Workshop Inc.
(BBW) are focused on revisiting and reevaluating of conventionality
and traditional business traits. They are also committed to
envisioning brick-and-mortar store merchandise offerings.
Additionally, these companies continue to actively reengineer and
retool various systems and processes (
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Moreover, the retail groups are coming up with strategic
initiatives to boost operating efficiencies, drive growth and
enhance shareholder value. Most of the retailers are focused on
abridging costs drastically to ensure competent operating
We believe that such measures are necessary to gain competitive
advantage over peers. However, focus on improving the top line
should be prioritized to gear long-term growth.
The retail industry is highly competitive and has significant
challenges. Although the U.S. economy has started to witness a
recovery, we still believe that 2012 will not fully mark the return
of the retail market. However, consumers have begun to slowly
regain confidence and some have cautiously increased their
Still, consumers remain sensitive to macro-economic factors,
including interest rate hikes, increase in fuel and energy costs,
credit availability, unemployment levels and high household debt
levels. Any or all of these factors may negatively impact their
discretionary spending, and in turn adversely affect the growth and
profitability of retail companies (
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Either way, an investment in a Retail ETF could be an
interesting choice in the market. For investors seeking to make a
play on the sector, we have highlighted three quality options that
could help to accomplish goals in this corner of the space:
SPDR S&P Retail ETF (
The SPDR S&P Retail ETF is an exchange-traded fund
incorporated in the USA. Its objective is to replicate as closely
as possible the performance of the S&P Retail Select Industry
Index, an equal-weighted index.
Investors should also note that this fund is not a market cap
weighted product like many others in the space, but is instead
equal weighted. This technique concentrates more on small and
medium cap companies rather than the larger ones.
While XRT focuses exclusively on retail companies, it spreads
its portfolio across various corners of this market. XRT is by far
the largest fund in the category with 96 holdings and a somewhat
low expense ratio of 35 basis points on an annual basis compared to
other ETFs in the category.
It is also the most popular ETF in the category as it trades
with the volume of 3.2 million shares a day, thereby offering
immense liquidity to the investors. The fund manages an asset base
of $926.3 million (
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There is little concentration risk in the fund as just 12.64% of
assets are invested in its top ten holdings. Among the portfolio of
96 holdings, 4.1% goes to the top three holdings namely Cabelas,
followed by Gap Inc Del and Shutterfly Inc. Despite the high
concentration on small and mid cap companies, the fund has been
able to deliver a good return of 16.4% in the year-to-date period (
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Market Vectors Retail ETF (
RTH tracks the Market Vectors U.S Listed Retail 25 Index. The
fund has a shallow portfolio comprised of less than 26 securities
with approximately 60.3% exposure in the top ten holdings. This
exposure is more focused towards large cap and mid cap companies,
with giant caps taking up most of the biggest spots.
The fund trades with a volume of 100,000 shares a day and has
assets under management of $16.2 million. The fund charges an
expense ratio of 35 basis points annually, which is the same as the
retail ETF giant XRT.
Among individual holdings, Wal-Mart occupies the top position in
the fund at just over 11% of the total. RTH does, however, offer a
significant amount of exposure to the online retail behemoth,
Amazon, Inc (
as well, giving the fund decent exposure to e-commerce.
Since the start of the year, the fund has delivered a return of
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PowerShares Dynamic Retail Portfolio (
PMR exchange trading fund tracks the Retail Intellidex. This
equity index is intended to offer capital appreciation through
appraisal of companies on the basis of a range of investment
criteria which includes: fundamental growth, stock valuation,
investment timeliness, and risk factors.
Investors should note that to obtain exposure via this route
they need to pay 60 basis points annually, which makes it the
second most expensive fund in the space. PMR does maintain
significant exposure to small cap and large cap companies, and
holds a small basket of just 29 stocks in total.
The fund is also, to some extent, concentrated more on its top
holdings, with 49.9% of the fund going to the top ten.
holds the first position in the list, closely followed by TJX
Companies and Whole Foods Market. This has helped the fund to
deliver a return of 39% during the trailing one year period.
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AMAZON.COM INC (AMZN): Free Stock Analysis
PWRSH-DYN RETL (PMR): ETF Research Reports
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SPDR-SP RET ETF (XRT): ETF Research Reports
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