Holding to true seasonal tendencies, select retail stocks and
that track them have been performing well over the past month.
Digging deeper into the retail space, investors may want to
consider ETFs that are heavy on apparel makers, according to a
research note published by S&P Capital IQ. The research firm
apparel retailers have benefited from slumping cotton prices.
"Higher cotton prices and rising manufacturing costs drove
retail prices up last fall (2011) and this spring," said S&P
Capital IQ. "Fortunately, many apparel retailers found that their
customers, while demanding value, were willing to stretch their
budgets when the product was right. However, as price increases
only partially offset higher apparel costs, most retailers felt a
pinch on their merchandise margins."
Regarding cotton prices, investors can track the iPath DJ-UBS
Cotton TR Sub-Index ETN (NYSE:
) to keep an eye on that commodity and the impact it is having on
apparel sellers. BAL has continued its fall from grace this year,
slumping 16.4 percent. The ETN closed just over $47 on Wednesday.
In March 2011, BAL traded above $110.
"With cotton prices declining this year, apparel costs are
lower this fall," according to the S&P note. "However, many
retailers have kept their prices flat, year-over-year, in order
to regain lost margin. Some retailers have also used their cost
savings to improve the quality of their apparel offerings. In our
view, lower product costs will continue to be a tailwind for
apparel retailers through next spring."
Investors should remember that not all retail ETFs are created
and that some good funds
can toil in obscurity
. In its note, S&P Capital IQ highlighted two retail ETFs,
including the Market Vectors Retail ETF (NYSE:
). S&P rates RTH Overweight.
Home to just 26 stocks, RTH allocates a mere 8.7 percent of
its weight to pure play apparel retail names. However, those
holdings include TJX Cos. and Limited Brands (NYSE:
), which S&P rates as four-star names. TJX is RTH's
ninth-largest holding with a weight of nearly 4.3 percent.
An ETF with a far larger allocation to the apparel sub-sector
is the PowerShares Retail Portfolio (NYSE:
). PMR, which has $52 million in assets under management, devotes
offer a third of its weight to apparel names. Limited is the
fund's second-largest holding at just over five percent while TJX
is PMR's number six constituent at almost 4.7 percent. Other
apparel names found in PMR include Gap (NYSE:
), Urban Outfitters (NASDAQ:
) and American Eagle (NYSE:
S&P rates PMR market weight. What separates PMR from a
fund such as RTH is small-cap exposure. Approximately 42 percent
of PMR's weight is devoted to small caps, both growth and value
names. In addition to TJX, both ETFs count Wal-Mart (NYSE:
), Costco (NASDAQ:
) and CVS Caremark (NYSE:
) among their holdings.
RTH is the cheaper fund with an annual expense ratio of 0.35
percent compared to 0.63 percent for PMR though the latter has
outperformed the former by 140 basis points in the past
For more on retail ETFs, click
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