Can a great holiday season rally these retail ETFs?

After a sluggish Q1 with flat earnings on 3.3% revenue growth, retailers started showing strength from Q2. The improvement was far from great as earnings rose 2.6% on 5.5% higher revenues and some sector bellwethers lowered their guidance. But the market showed sure signs of recuperating.

The recovery was evident in Q3 as well. Per the Zacks Industry Trend, the quarter should see 1.7% advancement in earnings while Q4 earnings are expected to jump as much as 4.9%. Meanwhile, U.S. consumer confidence touched a seven-year high in August reinforcing the slow-but-steady recovery.

In fact, consumer confidence rose for the fourth successive month helped by improved employment levels, decent housing numbers and a still-low interest rate environment.

If these were not enough, the National Retail Federation (NRF), together with the International Council of Shopping Centers, recently declared their expectation for all-important holiday sales. As a respite to retailers, the organization estimated a 4.1% jump in retail sales during this holiday season (November and December), a modest increase from last year’s 3.1% sales rise.  However, NRF does not consider auto, gas and restaurant sectors.

NRF noted that average holiday sales have improved 2.9% (a year) in the last 10 years, including the latest estimates. Retailers generate about one-fifth of annual sales during this period when people are in a mood of revelry. Holiday sales might cross the 4% benchmark for the first time in three years, as noted by NRF.

Moreover, per Reuters, the improvement in holiday sales will be supported by wealthy buyers.  Otherwise, consumers, who have just seen their economy emerging from a recession, will remain value-conscious, according to the NRF.  This can further be verified by the prediction of 8–11% jump in online sales (by shop.org). Deal loving buyers might get some solace from this surge. Not only NRF, if we look at the Reuters report, several other market researchers are singing the same tune.

Further, the latest Fed minute of keeping interest rates at the rock bottom level for as long as the economy needs, should boost consumers’ hopes and in turn be reflected in the holiday buying spree. A steep decline in fuel prices is yet another positive for the sector.

Those who share the same point of view as NRF might try out the retail or consumer discretionary ETFs mentioned below as a basket approach that could be far better than a single stock pick given the current uncertain market environment:

PowerShares Retail Fund (PMR)

This retail fund provides a diversified exposure across various market caps. This is easily done by tracking the Dynamic Retail Intellidex Index. The fund has accumulated $19.6 million in its asset base. The ETF charges 63 bps in fees per year.

In total, the product holds 30 securities with moderate concentration of 47.44% across the top 10 holdings. PMR was up 1.6% in the past five trading sessions. The ETF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

SPDR S&P Retail ETF (XRT)

This product looks to track the S&P Retail Select Industry Index, holding 102 stocks in its basket. It is widely spread across each component as none of these holds more than 1.15% of total assets.

In terms of sector holdings, apparel retail takes the top spot at one-fourth share.  The fund has amassed about $623.5 million in its asset base. The ETF charges 35 bps a year in fees.

XRT added 1.29% in the past five trading sessions. The ETF has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Market Vectors Retail ETF (RTH)

This fund follows the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket with AUM of $61.5 million. Expense ratio comes in at 0.35%. The product is heavily concentrated on the top 10 holdings with more than 60% of assets with the largest allocation of 10.76% going to Wal-Mart. RTH added only 0.32% in the past five trading sessions.

Bottom Line

While NRF’s latest prediction is quite bullish and inspires optimism around the retail sector, one cannot ignore some bottlenecks. Though a 4% year-over-year advancement is definitely compelling, investors should note that this number, if at all achieved, will be the result of a slightly easy comparison.

The last holiday season was one day shorter, so there is that benefit to consider for 2014 as well. Also, a surge in shopping prior to the holiday season might slow down the buying spree in the peak time. After all, the U.S. economy is still far from standing on its own two feet, so this bullish prediction from the NRF should definitely be taken with a grain of salt in the near term.
 
PWRSH-DYN RETL (PMR): ETF Research Reports
SPDR-SP RET ETF (XRT): ETF Research Reports
MKT VEC-RETAIL (RTH): ETF Research Reports
 
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Zacks Investment Research

Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.

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