The market at large is improving this year with the S&P
500 and Dow Jones reaching new highs on improving global
sentiment. While financials have led the way, a number of other
sectors have also performed admirably this year such in health
care and energy.
The retail sector has also performed remarkably well
5 Sector ETFs Surging to Start 2013
). This trend suggests a bullish run with widespread positive
sentiment throughout the equity world.
The retail sector is poised to benefit from an improving
economy, an increase in consumer spending and growing employment.
A recovery in the auto and housing market should fuel further
growth in the U.S. retail sector.
This is evident by the December sales number which grew 4.1%
year over year. This is a far better than the summer low of 3.5%
but still a long way from 9.2% achieved 18 months back. The
recovery in sales is yet to match the earlier highs.
While some are concerned over recent tax increases and high
gas prices in the U.S. market, this hasn't really trickled down
into consumer confidence yet. Furthermore, with surging home
prices and an improved employment situation many could be feeling
better about the economy, even with these negatives (read:
Time to Buy Retail ETFs?
This suggests that retail could still have some room to run,
and that these firms could benefit from overall positive market
trends. Given this, a look at the top ranked
in the space could be a good idea. One way to find a top ranked
ETF in the retail space is by using the Zacks ETF Ranking
About the Zacks ETF Rank
This technique provides a recommendation for the ETF in the
context of our outlook of the underlying industry, sector, style
box or asset class. Our proprietary methodology also takes into
account the risk preferences of investors as well.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of the five ranks within
each risk bucket. Thus, the Zacks Rank reflects the expected
return of an ETF relative to other ETFs with a similar level of
Using this strategy, we have found one ETF in the space -
SPDR S&P Retail ETF (
- that has a Zacks Rank #2 (Buy). We expect it to outperform its
peers in the high-risk tolerance bracket when compared to other
funds in the segment (see more ETFs in the
XRT: A Solid Choice in Retail Space
Launched in January 2006, the fund has emerged as a strong
winner in the retail space, producing more than 93% return over
the past three years. The product seeks to match the price and
yield of the S&P Retail Select Industry Index, an equal
weighted index. XRT is by far the largest and most popular fund
in the retail space.
The product holds a great deal of securities, about 98, and
offers wide diversification across individual holdings as no
single firm makes up more than 1.7% of XRT. These securities are
again well spread between growths and blend style. This ensures
concentration risk of just 2.39%.
Rite Aid (
are the top three holdings in the fund's portfolio.
Though the ETF charges 35 basis points per year in fees from
investors, expense ratio is considered the lowest in the
category. Additionally, the fund is extremely liquid as it trades
in higher volumes of more than 4 million shares per day. This
suggests that investors do not have to pay an extra cost in the
form of bid/ask spread at the time of trading.
The product has been able to manage assets of $754.5 million,
returning more than 6% year-to-date. In fact, this return is
higher than the returns from the S&P 500 fund (
) by roughly 140 bps. XRT also generated impressive returns of
about 20.8% last year and yields a good 1.54% in annual dividends
3 ETFs at the Heart of The Recent Rally
Further, the ETF has significant correlation with the S&P
500, as indicated by R-Squared of 67.87%. It is constantly
outperforming its benchmark index, as depicted by positive
XRT: A Focused Product
The fund allocates about half of the assets to small/micro cap
firms, which tend to be highly volatile than the large and mid
counterparts. Large and mid caps account for the remaining
portion of the basket (read:
Mid Cap ETFs Leading the Market in 2013
Small cap securities tend to have less correlation with the
macroeconomic trends and have less international exposure than
the large cap counterparts. So, these securities rely more on the
domestic economy. If the international economy performs better
than the domestic economy, then small cap stocks can
From a sector perspective, specialty retail takes the top spot
in the basket with 61% share, followed by departmental stores
(12%), Internet and catalog retail (11%), food retail (9%), drug
stores (4%) and hypermarkets (3%). This indicates its heavy
reliance on a particular sector.
As a result, XRT might experience levels of volatility, making
it a high risk tolerance product.
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
SPDR-SP RET ETF (XRT): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report