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3 Retail ETFs & Stocks Can Defy Soft Data

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Something surely went wrong in August. After the month witnessed muted manufacturing, service and job data, retail sales also came in weaker than expected. Retail sales in the U.S. dropped 0.3% sequentially in August, following an upwardly revised 0.1% increase in the prior month (read: August Job Data Muddles Fed Rate Hike Chance: ETFs to Buy).

The sales decline was wider than analyst’s expectation of a 0.1% fall. It was the first fall in retail sales since March this year. On a year-over-year basis, sales growth slackened to 1.9% from 2.4% in July.

Barring automobiles, gasoline, building materials and food services, retail sales dropped 0.1% in August after a similar drop in July. Excluding auto, sales slid 0.1%. Among the many losers, sales at miscellaneous store retailers fell 2.4%, hobby and book storesdeclined 1.4% and building material and garden equipment and supplies dealers slipped 0.7%. However, sales spiked 0.9% for food services and drinking outlets, 0.7% for clothing and 0.3% for food beverages.

The prospect of rising rates, an around 4.6% rise in retail gasoline prices and still-subtle wage growth in the U.S. might have caused consumers to be wary of spending. After all, commodity prices and inflation are both on the risethis year.

Market Impact

Quite expectedly, such downbeat retail sales data spread cheer among investors on diminishing possibilities of a rate hike. Also, in a second report, the Fed indicated that manufacturing production dropped 0.4% in August against July's gains. This further trimmed chances of a sooner-than-expected rate hike.

As a result, the confirmation of a few more months of easy money inflows boosted the broader market. Among the top ETFs, investors saw SPY and DIA each gain about 1% and QQQ advance about 1.6% on the day.

Since traders are now betting on an 18% chance of a rate hike next week, down from 30% last week, the U.S. dollar lost strength. PowerShares DB US Dollar Bullish ETF UUP was down about 0.04% on September 16, 2016 (read: Follow Goldman's Call on Dollar with These ETFs).

ETF Impact

Below we highlight a few ETFs that could be poised for gains despite soft retail sales (read: Should You Buy Retail ETFs Now?).

Amplify Online Retail ETF IBUY – Up 0.2% on September 15

Investors should note that department store sales declined 0.6% in August. In any case, the wind has been in favor of online retailing over the last few months. So, IBUY could be a good long-term pick if the Fed remains this accommodative for a few more days and energy prices remain low. The fund added 0.2% on September 15, the day retail sales were reported (read: Forget Broader Retail; Bet on Online Retail ETFs).

SPDR S&P Retail ETF XRT – Up 1.3% on September 15

The fund looks to track theS&P Retail Select Industry Index. More cheap money inflows should do some good to this ETF too. The fund has 29.3% exposure to apparel retail followed by 16.5% focus on specialty retail and 15.1% focus in automotive retail.

PowerShares Dynamic Food & Beverage ETF PBJUp 1% on September 15

Since food and beverage were able to stay afloat amid an industry-wide downslide, a pick on this segment would be interesting. The fund has 94.25% exposure to the consumer staples segment while 5.75% focus goes to consumer discretionary.

Stock Picks

We picked three retail-wholesale stocks on the basis of a VGM Style Score of ‘A’ or ‘B’ and a Zacks Rank #1 (Strong Buy). Our chosen stocks are:

The Children's Place Inc. PLCE – Up 3.22% on September 15

It is a specialty retailer of apparel and accessories for newborn to 12-year-old children. It has a VGM score of ‘A’, at the time of writing.

Tilly's Inc. TLYS – Up 2.87% on September 15

This is a specialty retailer in the action sports industry selling clothing, shoes and accessories. It has a VGM score of ‘A’.

Urban Outfitters Inc. (URBN - Free Report) – Up 2.87% on September 15

The company runs two business segments – a lifestyle-oriented general merchandise retailing segment and a wholesale apparel business. It has a VGM score of ‘B.’

Want more information on the world of ETFs? Make sure to check out the podcast below where we discuss the investing landscape with Kevin O’Leary and Connor O’Brien of O’Shares Investments:

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