Retail ETF Showdown – XRT, RTH, PMR

| October 17, 2014 | 0 Comments

showdownHalloween is still a few weeks away… but we’re already seeing retailers prepping for the holiday season.

Retailers are always anxious to get the holiday shopping season underway and they seem to get it started earlier every year. And after the disappointing September retail sales data, I’m sure they’re chomping at the bit to get consumers spending again.

You see, retail sales dropped 0.3% last month. That was worse than the 0.2% drop the market was expecting. The weakness in spending was widespread… autos, gasoline, internet retailers, clothing stores, and home-improvement places all had declining sales.

Needless to say, retailers will be doing everything in their power to get consumers to open their wallets during the holiday shopping season this year.

I think there’s a good chance retailers will get their wish…

Right now food and gas prices are falling. Gasoline prices are down 2.6% in the last month alone and diesel prices aren’t far behind. This helps retailers on two fronts.

First off, lower food and gas prices mean that consumers will have more money to spend on everything else. And since it’s the holidays, we’ll likely see that money being spent at other retailers rather than saved.

What’s more, retailers won’t pass along all of the drop in food and gas prices. They’ll pocket some of it and allow their profit margins to expand.

Don’t forget that fuel is a major cost for retailers. Nearly all food and other goods are transported by trucks. So the drop in fuel prices will help boost retailers’ earnings in the fourth quarter.

That’s a very compelling reason to have exposure to retail stocks this holiday season.

Let’s take a look at three retail ETFs…

SPDR S&P Retail ETF (XRT) is the largest of all retail ETFs. It currently has $826 million in assets under management.

At a recent price of $83.21, XRT is down 7.4% from the 52-week high and is down 5.25% year to date. It has a dividend yield of 0.8%. And the expense ratio is 0.35%.

XRT is made up of 102 stocks in retail industry. The stocks are equally weighted.

The equal weighting methodology skews this ETF toward smaller retailers. As a result, apparel retailers and specialty stores that are typically smaller make up 41% of XRT.

These retailers should see a nice boost in sales this holiday season.

Market Vectors Retail ETF (RTH) only has a fraction of the assets that XRT has under management. It currently has $59 million in assets.

At a recent price of $60.93, RTH is down 4.4% from the 52-week high and it’s only down 0.8% year to date. It has a dividend yield of 1.01% and an expense ratio of 0.35%.

RTH is outperforming XRT because it is dedicated to only the largest retail companies. It currently has 27 stocks that are weighted according to their market cap.

As a result, stores like (AMZN), Wal-Mart (WMT), Home Depot (HD), and CVS Caremark (CVS) dominate the holdings. They combine for 35% of RTH’s holdings.

PowerShares Dynamic Retail Portfolio (PMR) is an interesting retail ETF. But it has failed to gain traction with investors. PMR currently has just $20 million in assets under management.

That puts PMR at risk of being shut down by Powershares.

So far this year, PMR is down 6.5% and it’s 10.6% off the 52-week high. This ETF has the worst performance of all three of the retail ETFs. Yet, it has the largest expense ratio at 0.63%.

I’d avoid PMR. The performance is bad and the fees are too high.

Here’s the bottom line…

XRT, RTH, and PMR all approach the retail industry in a different way. XRT is spread across a large number of stocks from small and large companies alike. RTH focuses on the largest retailers. And PMR uses an unsuccessful fundamental weighting methodology that is causing it to underperform.

That makes XRT and RTH the best ways to use ETFs to get exposure to the retail industry as the holiday shopping season gets underway.

Good Investing,

Corey Williams

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Category: ETFs, Sector ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets three times a week. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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