Markets

2012 Retail ETF Landscape

There’s the big and very liquid SPDR S'P Retail (NYSEArca:XRT) and the quasi-active PowerShares Dynamic Retail Portfolio (NYSEArca:PMR).

The third fund, the Retail HOLDRS (NYSEArca:RTH), will morph into something new on Dec. 21. Van Eck is taking over the fund and will turn it into the Market Vectors Retail ETF. The ticker will remain the same.

While the new fund hasn’t launched yet, we can still get a sense of how it will stack up to the other two retail sector ETFs.

2012’s New Flavor:Vanilla

The big news is that the sector will finally have a plain-vanilla fund:a market-cap-weighted ETF. When it’s up and running, the new RTH will screen for firms that get their majority of revenue from retail, then select and weight the top 25 of them by market value of equity. The new RTH will pull from a broad universe of stocks from a market-cap point of view, but given its small basket, I’m guessing small-cap exposure will be tiny.

The top 10 holdings for each fund provide a snapshot on exposure and concentrations. I’m using the underlying index for the new RTH as a proxy for its holdings.

Retail ETFs - Top 10 Holdings

The new RTH looks to be the most concentrated, with about 65 percent of its weight in these top 10 stocks. In this respect, the new RTH tips its hat to its HOLDRS origins. The old HOLDRS RTH was even more concentrated.

A cap-weighted fund doesn’t sound like a big deal until you look at the other two retail sector funds. XRT is equal weighted, and PMR uses PowerShares’ Intellidex stock-picking methodology. XRT and PMR both lean heavily to small-caps in stark contrast to the new RTH.

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Basics

The new RTH will charge 0.35 percent, according to the Van Eck website. (The old HOLDRS fee was probably much cheaper. But I’ll skip the complicated fee structure here since it’s soon to be moot.) XRT costs 0.35 percent too. PMR charges more, perhaps in support of its complex stock selection and weighting methodology.

Retail ETFs at a glance

XRT dominates in terms of assets under management, with the old
HOLDRS RTH a distant second and PMR even further back.

XRT dominates in terms of assets under management, with the old HOLDRS RTH a distant second and PMR even further back.

It’s not clear how much of the old HOLDRS assets will transfer into the new RTH. RTH experienced over $250 million in net outflows over 2011, according to IndexUniverse data. A recent uptick in flows hints that maybe most of those who were planning to get out before the transition have already done so. But who knows?

Either way, I’m guessing the new RTH will have an asset base greater than that of the average newly launched fund, and maybe greater than PMR’s modest $28.3 million.

XRT’s a giant when it comes to trading, too. But as with assets, the new RTH is poised to come out of the gate in second place rather than third in terms of trading volume. This, in turn, could drive an increase in assets; as investors gain confidence, they can trade in and out without getting stung.

Returning briefly to holdings, XRT will remain the only choice for a diverse basket. But diverse doesn’t mean marketlike for XRT, thanks to its equal weight. I’m guessing the new RTH will be the clear choice for representativeness, even though it’s likely to be top heavy.

Performance

The index underpinning the new RTH started in August. While we probably shouldn’t infer too much from a few months of data, I couldn’t help peeking at how it’s fared against PMR and XRT indexes. The new RTH index is in dark blue, PMR’s index is in light blue and XRT’s is in gray.

Retail Index

The new RTH index lags for the period. Just eyeballing it, the new RTH index looks less volatile, too. The S'P 500 was up during the period also. From this data, and from the holdings we looked at above, we can guess that the new RTH will have lower beta to the broad market than the other two funds.

I’m optimistic that the new RTH will become an efficient means for marketlike exposure to the retail sector. The old HOLDRS played a similar role in the space, as much by accident as by design, given its fixed asset mix.

Who knew plain vanilla could be so refreshing?

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Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2011 IndexUniverse LLC . All Rights Reserved.

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


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

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