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Here's Why the Rally in Retail ETFs Will Continue in 2H

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The U.S. retail sector is back with a bang with SPDR S&P Retail ETF (XRT - Free Report) rising 5.4%, trumping the S&P 500’s 1.9% gains year to date (as of Jun 5). While the growing acceptance of online retailing cannot be denied, struggles seem to be over for department stores.  

Consumers’ tendency to shift to online shopping or ‘Amazonization’ has long been a cause of concern for brick-and-mortar retailers. But efficient cost and inventory management have put the spotlight on this neglected space in recent times (read: Online vs. Offline Retail: Recent ETF Winners).

Apart from this, there are some developments in the retail space that are driving stocks and ETFs and will keep those well-poised for the second half of 2018.

Omni-Channel Retailing Gaining Precedence

Omni-channel retailing, which is a combination of e-commerce and physical retail, has been coming to the forefront lately. This section of retailing covers all aspects like brick-and-mortar, mobile-browsing, ecommerce marketplaces and so on.

Notably, several traditional retailers are expanding in the online space.  Retail behemoth Wal-Mart (WMT - Free Report) recently bought a 77% stake in Indian e-tailer Flipkart to compete with Amazon (AMZN - Free Report) . Wal-Mart intends to achieve a 40% rise in online sales in fiscal 2019. The company is even starting a same-day delivery service, through just a text message, as part of its omnichannel retail and e-commerce program.

Another traditional retailer Kohl’s Corporation (KSS - Free Report) has also been benefiting substantially from its focus on technology improvement and omnichannel expansion. The company’s online sales surged 20% year over year in the first quarter.

Online Operators Eye Physical Stores

Surprisingly, even e-tailers are eyeing physical stores. The idea is to accomplish a ‘seamless customer experience’, per an article published on Forbes. To mention a few e-tailers, the Canadian cloud-based e-commerce platform company Shopify Inc. (SHOP - Free Report) is foraying into the brick-and-mortar arena. Online eyewear retailer Warby Parker, which is a unicorn startup, has chalked out an expansion plan which includes the opening of as many as 100 stores this year. A well-known shirt retailer Untuckit is also trying to open 50 new stores.

Solid Hiring Calls for Strength

The sector has been recruiting heavily. In May, retailers employed 31,000 heads. Most of the additions (13,000) were at general merchandise stores, while building material and garden supply stores created 8,000 and 4,000 jobs, respectively. In the last year, the sector had created 125,000 jobs (read: 4 Sector ETFs to Profit From Strong May Jobs Data).

Uptick in Economic Growth

The U.S. economy has been the strongest now since the last recession. The economy grew 2.2% in Q1 and recent estimates call for robust acceleration (which is 3.7%) in Q2 after a moderate Q1. Meanwhile, unemployment rate dived to an 18-year low, giving consumers confidence to splurge on discretionary items.

Cyclical Nature of the Sector

A pickup in the economy is great for a cyclical sector like consumer discretionary or retail. Such sectors perform better in a rising rate environment that we are witnessing currently in the United States.

Upbeat Earnings

The retail sector came up with strong growth rates in Q1. Earnings of the sector is expected to jump 20.4% in Q1 on 8.7% higher revenues, per the Earnings Trends issued on May 31. The sector is expected to post double-digit earnings growth rates in the rest of the three quarters of this year while revenue growth is expected around 5% to 7.5%.

ETFs in Focus

Thus, if you are bullish on the trend in the retail space, you can play funds like XRT, VanEck Vectors Retail ETF (RTH - Free Report) and Invesco Dynamic Retail ETF (PMR - Free Report) . For gutsy investors, there is a leveraged retail ETF — Direxion Daily Retail Bull 3X Shares (RETL - Free Report) .

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