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As a pioneer in the retail business, the United States provides ample retail growth opportunities for all types of retail sales. Retailers of any sizes, including individual direct marketers or direct sellers, small- to medium-sized franchise unit owners, and large ‘big-box’ store operators compete in the U.S. across a variety of markets, giving the country one of the most diversified retail sectors in the world

From a growth perspective, the retail industry ranks second among all the U.S. industries, and provides enormous employment opportunities. Annual sales turnover of the retail industry is more than 12% of total trade volume of all the U.S.-based businesses. Additionally, it accounts for over 11% of total employment in the country.

However, despite beginning the year on a strong note, sales slowed during the calendar second quarter. A drop in consumer spending was largely the culprit, although some analysts also blamed strange weather and consumer confidence as well for the slowdown.

Backdrop Still Weak

Uncertain and sluggish economic conditions continue to weigh upon the retailers, indicating a grim outlook in terms of profitability and hopes of more growth. However, a continuous effort on their part to offer innovative products and value pricing has been paying off in an economy which is still in the doldrums (Play A Consumer Recovery With These Discretionary ETFs).

Still, July’s figures for retail sales came in relatively solid, erasing memories of the three straight month decline that investors saw in the second quarter period. Sales especially crushed estimates on a retail sales less autos figure, which came in twice the consensus.

Yet despite this rebound, job growth remains anemic and consumer confidence isn’t exactly high at this point in time. Given these figures, it is still an uncertain trend in the retail market, a poor situation to be in as we head into the crucial fourth quarter for the sector.

Retail Trends for 2012

Beyond the uncertainly, there have been other trends in the retail market so far this year. The retail industry expansion trend that was witnessed in 2011 in terms of store openings seemed to fade in 2012 with the announcement of triple-digit store closing plans by leading retail chains.

The increased number of stores shuttered was mainly due to shift in consumer preferences and change in retail shopping trends, while it had little to do with any alteration in the industry fundamentals. Another reason behind these increased store closures by retailers is the growing demand for new shopping modes, namely on the Internet and mobile phones (Can Retail ETFs Surge In 2012?).

This has forced many to look to more transformative ways to keep retail in the 21st century and not get stuck behind technological advances. In light of this, the retail industry continues to reinvent, redesign and revitalize its physical store formats and consider these essential to maintain dominance.

Of late, retail giants including Best Buy Co. Inc., Target Corp., J.C. Penney Co. Inc. (JCP) and Build-A-Bear Workshop Inc. (BBW) are focused on revisiting and reevaluating of conventionality and traditional business traits.  They are also committed to envisioning brick-and-mortar store merchandise offerings. Additionally, these companies continue to actively reengineer and retool various systems and processes (Three Impressive Small Cap Dividend ETFs).

Moreover, the retail groups are coming up with strategic initiatives to boost operating efficiencies, drive growth and enhance shareholder value. Most of the retailers are focused on abridging costs drastically to ensure competent operating channels.

We believe that such measures are necessary to gain competitive advantage over peers. However, focus on improving the top line should be prioritized to gear long-term growth.

Challenges

The retail industry is highly competitive and has significant challenges. Although the U.S. economy has started to witness a recovery, we still believe that 2012 will not fully mark the return of the retail market. However, consumers have begun to slowly regain confidence and some have cautiously increased their spending.

Still, consumers remain sensitive to macro-economic factors, including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels. Any or all of these factors may negatively impact their discretionary spending, and in turn adversely affect the growth and profitability of retail companies (Lower Wal Mart Exposure with These Consumer ETFs).

Either way, an investment in a Retail ETF could be an interesting choice in the market. For investors seeking to make a play on the sector, we have highlighted three quality options that could help to accomplish goals in this corner of the space:

SPDR S&P Retail ETF (XRT)

The SPDR S&P Retail ETF is an exchange-traded fund incorporated in the USA. Its objective is to replicate as closely as possible the performance of the S&P Retail Select Industry Index, an equal-weighted index.

Investors should also note that this fund is not a market cap weighted product like many others in the space, but is instead equal weighted. This technique concentrates more on small and medium cap companies rather than the larger ones.

While XRT focuses exclusively on retail companies, it spreads its portfolio across various corners of this market. XRT is by far the largest fund in the category with 96 holdings and a somewhat low expense ratio of 35 basis points on an annual basis compared to other ETFs in the category. 

It is also the most popular ETF in the category as it trades with the volume of 3.2 million shares a day, thereby offering immense liquidity to the investors. The fund manages an asset base of $926.3 million (Guide to the 25 Most Liquid ETFs).

There is little concentration risk in the fund as just 12.64% of assets are invested in its top ten holdings. Among the portfolio of 96 holdings, 4.1% goes to the top three holdings namely Cabelas, followed by Gap Inc Del and Shutterfly Inc.  Despite the high concentration on small and mid cap companies, the fund has been able to deliver a good return of 16.4% in the year-to-date period (Three Cyclical ETFs That Are Surging Higher).

Market Vectors Retail ETF (RTH)

RTH tracks the Market Vectors U.S Listed Retail 25 Index. The fund has a shallow portfolio comprised of less than 26 securities with approximately 60.3% exposure in the top ten holdings. This exposure is more focused towards large cap and mid cap companies, with giant caps taking up most of the biggest spots.

The fund trades with a volume of 100,000 shares a day and has assets under management of $16.2 million. The fund charges an expense ratio of 35 basis points annually, which is the same as the retail ETF giant XRT.

Among individual holdings, Wal-Mart occupies the top position in the fund at just over 11% of the total. RTH does, however, offer a significant amount of exposure to the online retail behemoth, Amazon, Inc (AMZN - Analyst Report) as well, giving the fund decent exposure to e-commerce.

Since the start of the year, the fund has delivered a return of 16.2% (Two ETFs that Have Surged from Their Lows).

PowerShares Dynamic Retail Portfolio (PMR)

PMR exchange trading fund tracks the Retail Intellidex. This equity index is intended to offer capital appreciation through appraisal of companies on the basis of a range of investment criteria which includes: fundamental growth, stock valuation, investment timeliness, and risk factors.

Investors should note that to obtain exposure via this route they need to pay 60 basis points annually, which makes it the second most expensive fund in the space. PMR does maintain significant exposure to small cap and large cap companies, and holds a small basket of just 29 stocks in total.

The fund is also, to some extent, concentrated more on its top holdings, with 49.9% of the fund going to the top ten. Wal-Mart (WMT - Analyst Report) holds the first position in the list, closely followed by TJX Companies and Whole Foods Market. This has helped the fund to deliver a return of 39% during the trailing one year period.

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