Treat Yourself To An Early Christmas Gift

The Christmas season can be a time that makes or breaks a retailer's entire year. With that being said, most investors already know this information. It's not typical for a retailer's stock to experience a major pop or drop around the holiday season just because of revenue and earnings were three times that of the previous quarter.

But most reports currently indicate the American Consumer is healthy and feeling good. Which would indicate this holiday shopping season could be a record-setting year regarding the amount of money spent buying holiday presents. And a record-setting year is the type of event that would make a retailer’s stock pop. A large year-over-year revenue and earnings beat is the type of performance that Wall Street likes and rewards with a higher share price.

One report, in particular, the University of Michigan Consumer Sentiment Index was unchanged in November and remained higher thus far in 2018, at a 98.4, then in any prior year since 2000. Furthermore, the report indicates "income expectations have improved, and consumers anticipate continued robust growth in employment." "The renewed strength in nominal income expectations is critical to overall spending prospects. Among the working age population, those between the ages of 25 and 54, the anticipated annual gain in nominal household income was 3.6% in November, the best in the past decade" per the November report.

If the University of Michigan Consumer Sentiment Index is correct, we could be in for some really big number this holiday season. That being said, to fully realize the share price increase, it is best to buy the retailers before early holiday shopping reports are released. Obviously, by doing so, you take the risk of this year being an average or poor shopping season, but if you’re willing to take that risk, it could pay off nicely this year.

So, let's take a look at a few of the Exchange Traded Funds that you could purchase if you want to attempt to ride the retail waved this holiday season.

The first would be the most basic retail ETF, the SPDR S&P Retail ETF (XRT). The XRT tracks a board based, an equal-weighted index of US retail stocks. It has 92 holdings, all of which are US-based companies, with a weighted average market cap of $24.7 billion, offers a 1.38% yield, with a 0.35% expense ratio. Currently has just shy of $700 million in assets under management and has been around since 2006. Year-to-date the fund is up 5.25%, despite a rough three months in which it has lost more than 6%. Since the fund is equal-weighted, no one company dominates, and therefore your exposure to each retailer is minimal, a really good thing for investors looking to limit exposure.

The next ETF too look at would be the VanEck Vectors Retail ETF (RTH). RTH tracks a market-cap-weighted index of the 25 largest companies that derive the majority of their revenue from retail. The fund claims to have a global scope, but it currently has 98% of its assets in US-based companies. Unlike XRT, RTH is going to have large exposure to the larger retailers. For example, Amazon.com (AMZN) represents 17.5% of the fund, while the second largest holding is the Home Depot (HD) at 10.29%, and 70% of its assets in the top ten holdings.

Furthermore, due to its investing parameters, the weighted average market cap in the fund is a massive $278 billion. RTH also pays a yield of 1.36% and has an expense ratio of 0.35%. RTH has only been in existence since 2011 and currently only has $129 million in assets under management, meanings there is a little concern about fund closure but nothing serious at this time.

The next two options are a little more on the specialty side. The first that we will look at is the ProShares Long Online/Shore Stores ETF (CLIX). CLIX is designed to give investors 'long' exposure to online retailers while simultaneously 'shorting' brick-and-mortar retailers. The idea that online shopping will eventually destroy all brick-and-mortar retailers was taken to heart when this ETF was created. The fund has an expense ratio of 0.65%, which would be in addition to the cost’s of holding short positions, which is done to buy the use of swaps. Recent data and common sense indicate Amazon.com and Alibaba (BABA) where the funds two largest holdings, representing somewhere in the range of 35% of CLIX’s assets. Speaking of assets, CLIX only has $48 million, and its inception date was November 14th, 2017. Due to its use of swaps and somewhat high expense ratio, investors should not buy and hold CLIX long term, but it could be a fun way to play the holiday shopping if you believe online shopping will outperform brick-and-mortar.

And finally, the riskiest option, but also the one that could offer the most upside is the Direxion Daily Retail Bull 3X Shares ETF (RETL). The RETL is a three times leveraged ETF that will give you three times the move higher if the underlying index, the S&P Retail Select Industry Index, makes a positive move. The risk is that if that index falls, the RETL will lose three times of the amount of the decline. This is a high risk, high reward ETF on top of the fact that because it is leveraged, it has a high daily expense as the fund must rebalance its holdings, which eats into the fund’s capital. Furthermore, RETL has a very, very high expense ratio of 1.12%. Lastly, RETL is not a cut and dry retail ETF; it gives extra weight to apparel, auto parts & service, and specialty retailers while department stores are underweighted.

Regardless of whether or not you believe buying retail stocks is a good or bad idea ahead of the holiday shopping season, just consider having some exposure to the sector at some point over the next few months because even if we are heading for a recession, while other sectors may see revenues fall off a cliff, retail typically holds up somewhat well. Think about this, if the economy is slowing perhaps large construction projects are put on hold, but are you going to put your weekly grocery trip on hold, or how about replacing that pair of pants that ripped. The quantity of retail spending may decline, but not as dramatically as other industries.

When all the ships in the sea are sinking, swim to the one that is sinking the slowest.

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

Disclosure: This contributor held long positions in Home Depot and Amazon.com 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.

2 thoughts on “Treat Yourself To An Early Christmas Gift

  1. Nice piece of propaganda, buddy. Treat yourself??? How much debt do you really think the consumer, the states, the feds, and everyone else can pile on before things go horribly wrong? Why don't you go get yourself a clue, buddy? Healthy consumer? A guess you'd probably think a heroin addict was healthy as long as they had a needle in their arm. Of course you can't be faulted, you're just trying to peddle your irrelevant newsletter.

    "But most reports currently indicate the American Consumer is healthy and feeling good. Which would indicate this holiday shopping season could be a record-setting year regarding the amount of money spent buying holiday presents. And a record-setting year is the type of event that would make a retailer’s stock pop. A large year-over-year revenue and earnings beat is the type of performance that Wall Street likes and rewards with a higher share price. "

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