Now May Be the Time to Buy Retail ETF's

Matt Thalman - INO.com Contributor - ETFs


A Wells Fargo analyst recently said retail has bottomed and now may be time to start buying into the sector. With a weak holiday shopping season, followed by poor retail numbers in January and February retail stocks have hit hard times.

Compound that with the need for clarity on a possible border tax and other political issues hanging in the background, uncertainty in the industry is high. But while high uncertainty leads to lower stock prices, it also brings opportunity for smart investors.

Currently we are seeing specialty retailers outperforming the big box retailers like Macy's, Kohl's, Sear's, and JCPenny's. The downsizing of the big box retailers is also a good thing for the smaller players since it gives shoppers fewer options to choose from. But as a whole, this downsizing is hurting the group's overall performance as share prices of the big names companies have been beaten up.

That in turn leads to the issue of trying to cherry pick the winners and the losers in the space. Who is going to fail and who is going to succeed is a difficult question to accurately answer which is why the best way to play retail today is through the diversity Exchange Traded Fund's offer.

My favorite ETF in the retail space is the SPDR S&P Retail ETF (PACF:XRT). After peaking at $48.16 on December 8, shares are now trading 10% lower at around $43. XRT pulls retail stocks from the broad S&P Total Market Index, not just the S&P 500, which gives it even more diversity than some other funds. It currently has holdings in 100 different companies, all based in the U.S. and runs the gambit from apparel & accessories, specialty retailers, drug stores, and even automotive & parts retailers. Costco, Ulta Salon, O'Reilly Automotive and CVS are all in the top 10 of the fund's holdings with its largest holding representing just 2.3% of assets. The fund holds all the big retail names like Wal-Mart, but due to its small position size in each stock, if a big box chain like Sear's or Macy's does collapse, the fund will not be terribly affected by just one company.

XRT has an expense ratio of just 0.35%, yields 1.36% and has been around since 2006. The ETF trades at an average spread of just 0.03% and often has a high short interest, which would provide additional upside pressure when some of the uncertainty within the industry subsidies.

If you feel XRT is spreading your money a little too thin and would prefer an ETF that focuses more on picking the winners and loser than maybe PowerShares Dynamic Retail Portfolio (PACF:PMR) is more for you. PowerShares ETF holds just 30 stocks and is primarily focused on apparel & accessories and food retail & distribution. Its largest holding is in CVS, with Kroger, Walgreens, Ulta Salon, and Wal-Mart rounding out the top five.

It has a slightly higher expense ratio of 0.63%, which is because PMR is a more managed fund. It offers a dividend yield of 0.91% and trades at an average spread of 0.19%. It also has a long track record as it was started back in 2005. The only other downside is the amount of assets under management is only $21.5 million, compared to XRT's more than $700 million.

Lastly I would like to point out the VanEck Vectors Retail ETF (PACF:RTH) which tracks a market-cap-weighted index of the 25 largest US listed companies which produce the majority of their sales from retail. RTH currently has 26 holdings, the 25 from the index and a cash position, and the largest holding is Amazon.com at 15% of assets. Home Depot, Wal-Mart, Costco, and CVS round out the top five. The top ten holdings make up 63% of the funds' assets, meaning this ETF is really top heavy and doesn’t offer as much diversity as XRT. But its concentrated exposure in just the top 25 US based retailers does mean it carries less risk than other ETF's.

It has an expense ratio of just 0.35%, trades at an average spread of just 0.04%, boasts a dividend yield of 1.74% and has $73 million in assets under management. While XRT is down 8% since December, RTH is off just about 1% since that date and over the last year it's up more than 10.6%.

Remember investing in retail is not an easy task. With fashion trends constantly changing and the move to online shopping, a company killing it today may be in dire straits tomorrow. But, there is money to be made in the sector and having even a little exposure to retail stocks through ETF's is a good idea.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor held long positions in Kroger, Amazon.com, and Home Depot at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.