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ETF News And Commentary

The holiday season started with a bang on an improving retail sales trend, a bullish stock market, and encouraging economic and industry fundamentals. In fact, retail stocks surged over the past few weeks with most of them hitting new highs.

Encouraging Fundamentals

The job market remains the most progressive area with the longest streak of overall job growth since the financial crisis, an unemployment rate below 5% and average annual wage growth that has surged to levels not seen since the financial crisis. Strong consumer spending, rising confidence and low inflation added to the enthusiasm.

This is especially true given that consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% in September. Retail sales nudged up 0.8% in October followed by a revised 1% jump in September, which represents the biggest back-to-back increase since March–April 2014 (read: Retail Sales Sustain Winning Momentum: ETF & Stock Bets).

Another report shows that the University of Michigan consumer sentiment index rose to a six-month high of 93.8 in November from 87.2 in October and a preliminary reading of 91.6, indicating that Americans have become more optimistic after Donald Trump won the election.

Trump Bull Rally

After crossing all the hurdles, U.S. stocks ranging from large caps to small caps hit all-time highs last week, indicating that the bull still has legs. The elect-President has spread optimism in the economy and set the stage for higher interest rates that drove most of the rally. Trump has promised to accelerate economic growth, spend big time on infrastructure, reduce regulations, cut taxes and create more jobs in the country (read: 6 Leveraged ETFs Soaring on Trump Rally).

Solid Holiday Forecast

According to data compiled by the National Retail Federation (NRF), holiday sales – online and in stores – are expected to grow 3.6% for November and December to $655.8 billion. This is higher than the average growth of 2.5% over the past one decade and an average of 3.4% over seven years since the recovery began in 2009.

This indicates that total spending during the holiday shopping season will likely reach $935.58, the second highest level after last year’s record spending of $952.58. Among the various categories, department stores and online sites would be the hot spots with 57% of consumers planning to shop in these places. About 56% of consumers will shop from discount stores, 44% from grocery stores or supermarkets, and 34% from clothing or accessories stores.  

E-commerce retailers are poised to benefit the most from the surge in online shopping, especially mobile. The NRF expects online sales to increase 7–10% to as much as $117 billion while eMarketer projects digital sales to hit $94.71 billion, up 17.2% from last year. Investors should note that Amazon (AMZN) continues to dominate the e-commerce world with half of the searches made on the site. Brick and mortar retailers like Wal-Mart (WMT) and Target (TGT) have stepped up their online offerings to catch up with Amazon (see: all the Consumer Discretionary ETFs here).

Per the Zacks Earnings Trends, retail sector revenue from constituents of the S&P 500 index is expected to rise 5.2% in the holiday quarter to $497.5 billion. The rate is much higher than 4.1% growth for the S&P 500 companies as a whole.

Retailers Felt Upgrade

A number of retail stocks was upgraded to Zacks Rank #1 (Strong Buy) or #2 (Buy) last week on holiday fervor. Some of these include Target, Ross Stores (ROST), Nordstrom (JWN), Zumiez (ZUMZ), The Cheesecake Factory Incorporated (CAKE), McDonald's Corporation (MCD), Papa John's International Inc. (PZZA), ULTA Salon (ULTA), The Children Place (PLCE) and Weyco Group (WEYS).

ETFs to Consider
 
In view of the reasons discussed above, we strongly believe that investors should consider retail ETFs. We have highlighted five of these that provide a broad exposure to the sector:

SPDR S&P Retail ETF (XRT - Free Report)

This product tracks the S&P Retail Select Industry Index, holding 98 securities in its basket with none accounting for more than 1.5% of assets. Apparel retail takes the top spot at one-fourth share while specialty stores, automotive retail, and Internet retail round off the next three spots with a double-digit allocation each. The fund has amassed $815 million in its asset base and charges 35 bps in annual fees. The fund surged nearly 10% over the past one-month period and has a Zacks ETF Rank of 1 with a Medium risk outlook (read: Retail ETF Hits New 52-Week High).

PowerShares Retail Fund (PMR - Free Report)

This fund follows the Dynamic Retail Intellidex Index. In total, the product holds 30 securities with none holding more than 5.3% of assets. In terms of industrial exposure, specialty retail takes the top spot at 41%, while food retail (19%) and hypermarkets (12%) round off the top three positions. The fund has accumulated just $22.4 million in its asset base and charges 63 bps in fees per year. It gained 9% over the past one month and has a Zacks ETF Rank of 2 with a Medium risk outlook.

VanEck Vectors Retail ETF (RTH - Free Report)

This fund provides exposure to the 26 largest retail firms by tracking the MVIS US Listed Retail 25 Index. Of these, AMZN takes the top position in the basket with 17.4% share while other firms hold no more than 7.2%. The ETF has a certain tilt toward specialty retail, which accounts for 29% share while Internet retail (21%), departmental stores (11%), hypermarkets (11%), and drug stores (9%) round off the top five. The product has amassed $104.3 million in its asset base and charges 35 bps in annual fees. RTH was up 2.6% over the past one month and has a Zacks ETF Rank of 1 with a Medium risk outlook.

Amplify Online Retail ETF (IBUY - Free Report)

This ETF debuted in the space seven months ago and has already attracted $4.2 million to its asset base. It offers global exposure to companies that derive 70% or more revenue from online and virtual retail by tracking the EQM Online Retail Index. The fund is home to 42 stocks that are widely diversified, with each holding no more than 3.6% of assets. The product charges 65 bps in fees per year and added 3.5% over the past one month (read: Online Shopping Gaining Traction: ETFs to Buy).

First Trust Nasdaq Retail ETF (FTXD - Free Report)

The fund follows the Nasdaq US Smart Retail Index and holds 49 stocks in its basket. It is moderately concentrated across components, with each firm holding less than 8.3% of assets. While specialty retailers and apparel retailers make up for a bigger chunk at 30.7% and 26.1%, respectively, broadline retailers, and food retailers & wholesalers round off the next two spots. FTXD has accumulated $2.1 million within two months of its debut and has an expense ratio of 0.60%. The ETF gained 6.7% over the past one month.



 

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