With rising consumer confidence, steady job growth, recovering
housing prices and lowering gas prices, the retail sector is
poised to benefit from a broad recovery. Retailers are focusing
on several technological improvements, inventory rightsizing, and
enhancing efficiency and competence (read:
Spending is Surging: Stock Up on These ETFs
Further, cost-containment efforts and merchandise initiatives
to improve margins are the top priorities. However, investors
remain concerned about the impact of the implementation of higher
taxes and the expiration of the payroll tax cut in the first half
of the year that could curtail consumer spending, thereby
increasing the threat of reducing retail sales.
Despite this concern, retail
are gaining traction. The ETFs outperformed the broader market,
as measured by the S&P 500, generating over 20% returns
versus a gain of 16% for the S&P 500 (read:
Guide to Retail ETFs
These ETFs showed heavy volumes on better-than-expected retail
sales for the month of December. Sales rose 0.5% from the prior
month and 4.1% over the last year owing to increasing sales of
cars and home furnishings.
Investors have a couple of choices in the retail space that
could provide great opportunity in this rocky market environment.
The sector can be a big beneficiary of broad recovery and can be
one of the first sectors to jump when consumer confidence
Below, we take a look at three interesting choices in this
space. While all have some similarities, there are some key
differences that investors should be aware of before making a
final choice in this surging space:
SPDR S&P Retail ETF (
Launched in January 2006, this ETF seeks to replicate the
price and performance 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 with AUM of $922 million
and more than four million shares change hands every day.
With 98 securities in its basket, the fund offers wide
diversification across individual holdings as no single firm
makes up more than 1.5% of XRT. In terms of industry exposure,
specialty retail accounts for nearly 62% of assets, while
department stores and Internet/catalog retail account for another
The product concentrates more on small and medium cap
companies rather than the larger ones (read:
Mid Cap ETFs Leading the Market in 2013
). Though the fund charges 35 basis points per year in fees from
investors, expense ratio is the lowest in the category.
XRT has generated impressive returns of about 19% last year
and 4.4% so far this year. Further, the product yields 1.59% in
Currently, XRT has a Zacks ETF Rank of 2 or 'Buy'. This
suggests that this product is expected to perform well over the
long haul, when compared to other funds in the segment.
PowerShares Dynamic Retail Portfolio (
This fund tracks the Dynamic Retail Intellidex Index, which
uses various investment criteria like price momentum, earnings
momentum, quality, management action and value to include stocks
in the list.
Launched in October 2005, the product holds 30 securities with
AUM of $38.6 million. The fund is concentrated more on its top
holdings as it puts more than 46% in top ten firms.
), CVS/Caremark (
) and Costco Wholesale (
) enjoy the top three positions in the basket. Specialty retail
accounts for nearly 52% of assets, while food retail and drug
stores account for another 27% combined.
PMR maintains significant exposure to large cap and small cap
companies. The ETF is the second most expensive fund in the
space, charging 60 bps in fees per year. The fund trades with a
small volume of over 24,000 shares per day, so total costs could
be a bit higher (read:
Dollar Cost Averaging with ETFs: Does It
The fund delivered return of 15% over last year and about 2.1%
year-to-date. Additionally, the product yields a decent dividend
of 2.26% annually. These returns could be higher if the economy
continues to improve. For this reason, we give this fund a Zacks
ETF Rank of 2 or 'Buy'.
Market Vectors Retail ETF (
This fund, launched in December 2012, seeks to match the
performance of the Market Vectors U.S. Listed Retail 25 Index,
before fees and expenses. The ETF is focuses more on large cap
and mid cap companies, with giant caps taking up most of the
With 26 stocks in its basket, the product is not spread across
individual securities as it invests 64.3% of the assets in top
ten firms. Wal-Mart Stores (
) occupies the top position in the fund with over 11% share,
followed by Amazon.com (
) and Home Depot (
) with combined more than 18% of RTH.
About 31% of the portfolio goes to specialty retail companies
while 40% goes towards hypermarkets, departmental stores and drug
The fund trades with a volume of about 91,000 shares a day and
has assets under management of $30.5 million. The fund charges an
expense ratio of 35 basis points annually, which is the same as
the retail ETF giant XRT. The product delivered a return of
nearly 20% last year and has gained 3.5% since the start of the
year. XRT pays a good dividend yield of 1.94%.
RTH currently has a Zacks Rank # 2 or 'Buy' rating. This
indicates that the ETF would outperform its peers in the
discretionary space over the long haul.
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PWRSH-DYN RETL (PMR): ETF Research Reports
MKT VEC-RETAIL (RTH): ETF Research Reports
SPDR-SP RET ETF (XRT): ETF Research Reports
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