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Consumer ETFs Slip as Wal-Mart Guides Earnings Lower

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The luster is seemingly not returning for Wal-Mart Stores Inc. (WMT), at least not in this fiscal year. The retail giant has seen underperformances on top- and bottom-line estimates for most of the year. To add to its woes, the staples behemoth has cut its fiscal 2014 view thrice in one year with the latest trimming, though marginal, announced on January 31.

Reduced Wal-Mart Outlook

Wal-Mart – due for earnings release on February 20 – anticipates adjusted earnings per share from continuing operations to be at, or slightly below, the low end of the range of $1.60 to $1.70 for the fourth quarter. For the full year, the company expects earnings to be on par or slightly lower than the low end of the range $5.11 to $5.21 per share.

Investors should note that, in concurrence with the Q3 earnings release, Wal-Mart had revised its adjusted earnings expectations from a range of $5.10– $5.30 to $5.11–$5.21 per share. Prior to this, with the release of 2Q earnings, Wal-Mart lowered its earnings expectations from a range of $5.20–$5.40 to $5.10–$5.30 per share. A challenging sales environment and currency headwinds were held responsible for this lowered outlook.

Market Impact

Quite expectedly, Wal-Mart slipped into the red in the key trading session shedding 0.09%. The stock also fell 0.20% in after-hours trading. The slump was also felt in the ETF space, with consumer staples ETFs having considerable exposure to Wal-Mart being largely hit.

Funds like Market Vectors Retail ETF (RTH), Consumer Staples Select Sector SPDR (XLP) and Consumer Staples ETF (VDC) have the biggest allocations in Wal-Mart. The trio had seen sluggish trading last Friday. RTH fell1.27% at the close of January 31 while XLP fell 0.49% and VDC lost 0.41%.

Notably, apart from the weak Wal-Mart guidance, there were other reasons that went against these funds. An earnings miss from the top allocation Amazon (AMZN) (8.55%) caused substantial loss for RTH while it also put a shadow over the rest of the sector (read: 3 ETFs to Watch on Amazon Earnings Miss).

RTH in Focus

This fund provides exposure to the 26 top retail firms by tracking the Market Vectors U.S. Listed Retail 25 Index. Of these, AMZN takes the top spot at 8.86%. The product has amassed $38.7 million in its asset base and charges 35 bps in annual fees.
The ETF has a certain tilt toward growth stocks, accounting for more than half of the portfolio, while sector wise, specialty retail has one-third of the share. The in-focus Wal-Mart takes the second spot with about 8.54% weight.

RTH is down over 6% in the year-to-date time frame and has room for upside given the Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘Low’ risk outlook.

XLP in Focus

One of the most popular consumer ETFs on the market, XLP follows the S&P Consumer Staples Select Sector Index. The fund invests about $6.45 billion of assets in 42 holdings. Of these firms, the in-focus Wal-Mart takes the fourth spot, making up roughly 7.83% of the assets.

In terms of sector exposure, the fund is skewed toward food & staples retailing which makes up for one-fourth share, closely followed by household products (20.8%) and beverages (20.2%).

The fund charges 18 bps in fees per year from investors. The fund lost about 5.0% so far this year. XLP currently has a Zacks ETF Rank of 4 or ‘Sell’ with a ‘Low’ risk outlook (read: Consumer ETFs in Focus on Muted PG Earnings).

VDC in Focus

Managing an asset base of over $1.59 billion, this fund provides exposure to a basket of 111 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. The product charges a low fee of 14 bps per year from investors (see all the Consumer Discretionary ETFs here).

The ETF is highly concentrated across its top 10 companies at nearly 61% of the assets.  Wal-Mart takes the fourth spot with around 7.3% exposure in the fund.

VDC lost over 5.0% in the year-to-date frame. The fund has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Low’ risk outlook (read: Follow Warren Buffett in 2014 with These Sector ETFs).

Bottom Line

Investors should note that growth in consumer staples will likely pick up from the upcoming quarter as per the Zacks Earnings Trend.

Though currently Wal-Mart is not on our wish list as evident from its Zacks Rank #4 (Sell) for company-specific reasons, investors eyeing the consumer ETF space can consider buying in those products on their recent dip. And to do this, RTH should be a better option as it is a blend of both cyclical (high-growth) and non-cyclical corners of consumer ETFs which may be the way to play the space going forward.

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