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4 Reasons to Buy Retail ETFs Now

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The retail sector has been in great shape with SPDR S&P Retail ETF (XRT - Free Report) and VanEck Vectors Retail ETF (RTH - Free Report) returning 18.3% and 18.3%, respectively, compared with the SPDR S&P 500 ETF’s (SPY - Free Report) 8.5% (as of Oct 3, 2018).

A solid labor market and higher take-home pay amid tax reductions probably drove Americans’ ability to spend, helping them tide over the sudden spike in fuel costs (read: ETF & Stock Picks to Defy Subdued US Retail Sales in August).

Against this backdrop, we highlight a few factors that explain why retail ETFs are up for more gains.

Buying in Holiday Season

The late October-December period embraces the key holiday season, which puts the spotlight on the performance of retailers. As a series of sales-boosting events — Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas — fall in this quartile, the sector generally sees a sales boost.

Holiday retail sales this year — barring automobiles, gasoline and restaurants — are likely to be between $717 billion to $721 billion, according to the National Retail Federation, an industry trade group. Sales will see a growth rate of 4.3% to 4.8%, which will be lower than last year’s rate of 5.3% but higher than the five-year average of 3.9%.

However, Deloitte expects sales to increase between 5% and 5.6% from a year ago. E-commerce sales are expected to surge 22% through the holidays, up from 16.6% online retail sales growth a year ago.

Upbeat Earnings

The third quarter of 2018 is likely to see a 14.8% rise in earnings for 6% top-line growth, per Earnings Trends issued on Oct 3, 2018. The fourth-quarter is expected to witness 23% earnings growth on 5% sales expansion.

Wealth Effect

The S&P 500, the Nasdaq and the Dow Jones have been hovering around a record high. Some cooling in global trade tensions with the new USMCA deal signed (which replaces NAFTA) and a flurry of strong economic data points pushed the indexes higher. If the ascent is maintained, a wealth effect can be realized. 

As per Investopediathe wealth effect helps to power economies during bull markets. Big gains in people’s portfolios can make them feel more secure about their wealth and their spending.” Investors should also note that cyclical sector ETFs like retail do not underperform in a rising rate environment, the kind we are witnessing at present (read: 4 Sector ETFs That Crushed S&P 500 in Longest Bull Market).

Oil Price to Drop?

Though we have seen an oil rally in the recent past, the chances of a raise in output from Saudi Arabia and Russia have weighed on the prospects of an oil rally in the coming days. Russia and Saudi Arabia struck a deal in September to boost their oil output and informed the United States about their plan, per Reuters. If this happens, the oil rally is likely to slow down (read: Higher Oil Prices to Spell Trouble for These Country ETFs).

ETFs in Focus

Against this backdrop, investors may find investing in retail ETFs interesting. First Trust Nasdaq Retail ETF (FTXD - Free Report) , XRT, Amplify Online Retail ETF(IBUY - Free Report) , RTH and ProShares Online Retail ETF (ONLN - Free Report) should thus be followed.

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