Will Target Warnings Spell Trouble for Retail ETFs?

Big-box retailer, Target TGT, dampened investors’ mood after it slashed its second-quarter profit margin outlook for the second time since mid-May. This has spread pessimism in the sector, making investors cautious about the stock and the retail ETFs. As such, SPDR S&P Retail ETF XRT, VanEck Vectors Retail ETF RTH, Amplify Online Retail ETF IBUY and ProShares Online Retail ETF ONLN are in focus (see: all the Consumer Discretionary ETFs here).

Target will take several actions in the second quarter — including markdowns, removing excess inventory and canceling orders — to ease an inventory surge and supply-chain constraints. The move will hurt profitability in the ongoing quarter. The retailer now projects its second-quarter operating margin to be around 2%, down from the previous expectation of an operating margin in a wide range centered around 5.3%.

The plunge comes in less than a month. The company’s shares crashed 30% after its first-quarter earnings missed expectations.

However, the outlook for the retail sector seems encouraging, given an uptick in consumer spending. Retail sales rose in April as Americans accelerated their spending at restaurants and bought more motor vehicles amid an improvement in supply chains. Although consumer confidence dipped to a two-month low at 106.4 in May from 108.6 in April on worries over inflation and slowing economy, it is still a strong reading (read: ETFs & Stocks to Win on Uptick in April Retail Sales).

Below we have highlighted ETFs in detail:  

SPDR S&P Retail ETF (XRT)

SPDR S&P Retail ETF tracks the S&P Retail Select Industry Index, which provides exposure across large, mid and small-cap stocks. It holds well-diversified 108 stocks in its basket. SPDR S&P Retail ETF is well spread across various industries with a double-digit allocation each in apparel retail, automotive retail, Internet & direct marketing retail, and specialty stores (read: Wave of Dismal Q1 Earnings Drags Retail ETFs Down).

SPDR S&P Retail ETF is the largest and most popular in the retail space, with AUM of $424.7 million and an average trading volume of 6.4 million shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

VanEck Vectors Retail ETF (RTH)

VanEck Vectors Retail ETF provides exposure to the 25 largest retail firms by tracking the MVIS US Listed Retail 25 Index, which measures the performance of the companies involved in retail distribution, wholesalers, online, direct mail and TV retailers, multi-line retailers, specialty retailers and food and other staples retailers. VanEck Vectors Retail ETF is highly concentrated on the top two firms with double-digit exposure each, while the other firms hold no more than 7.6% share.

VanEck Vectors Retail ETF has amassed $158.1 million in its asset base and charges 35 bps in annual fees. It trades in a lower volume of 12,000 shares a day on average. VanEck Vectors Retail ETF has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Amplify Online Retail ETF (IBUY)

Amplify Online Retail ETF offers global exposure to companies that derive 70% or more revenues from online and virtual retail by tracking the EQM Online Retail Index. IBUY holds 74 stocks in its basket, with none accounting for more than 2.5% of assets. Amplify Online Retail ETF has the largest allocation in traditional retail at 49.5% followed by 36.9% in marketplace.

Amplify Online Retail ETF has attracted $259.8 million in its asset base and charges 65 bps in annual fees. IBUY trades in an average daily volume of 65,000 shares.

ProShares Online Retail ETF (ONLN)

ProShares Online Retail ETF offers exposure to the company that principally sells online or through other non-store channels, and then zeroing in on the companies reshaping the retail space. It tracks the ProShares Online Retail Index, holding 40 stocks in its basket. ONLN is highly concentrated on the top two firms, while other firms hold no more than 5.1% of assets. American firms make up three-fourth of the portfolio, while Chinese firms account for 17% share (read: Amazon Soars Ahead of Stock Split: ETFs to Gain).

ProShares Online Retail ETF has accumulated $316.2 million in its asset base and charges 58 bps in annual fees. ONLN trades in an average daily volume of 100,000 shares.

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