Watch your step — there’s blood in the mall.
You’d have to shut down your computer and cancel your Barron’s subscription to avoid headlines about the bludgeoning going on across many retail stocks right now. Just a few examples?
- Express (EXPR) being taken to the shed over poor Thanksgiving weekend sales.
- Abercrombie & Fitch (ANF) doing so poorly that activist fund Engaged Capital has started calls for CEO Michael Jeffries’ head. In fact, ANF and brethren American Eagle (AEO) and Aeropostale (ARO) have all been beat up this year, sporting losses of 20% or more across the board.
- JCPenney (JCP) tried to tout its improved sales in October during its Q3 earnings report, but it was hard not to notice the overall revenue decline of 5% or the wider-than-expected $1.81 per share loss.
- More broadly, Black Friday weekend spending suffered its first setback since 2009, dropping 2.9% to $57.4 billion. Note: That’s online and in-store combined, so record Cyber Monday sales weren’t enough to carry brick-and-mortar’s lackluster performance.
And exactly none of that should keep you from buying into retail stocks right now.
You just have to do it right.
In the wake of the Express blow-up, Jim Cramer warned about the “volatile minefield” that is retail stocks, saying “Perhaps the best thing to do is to just stay away from the damned thing until we get some clarity.” And on a single-stock level, I couldn’t agree more — you’ll lose a leg out there.
However, broadly speaking, as long as the American economy continues to inch forward, retail should benefit. So it makes little sense to avoid the sector. Your best bet, in fact, is to avoid individual retail stocks and dive into retail exchange-traded funds instead.
Funds such as the SPDR S&P Retail ETF (XRT) and Consumer Discretionary SPDR (XLY), as well as the newer Market Vectors Retail ETF (RTH), have had no such issues. Not only have they been steady Eddies — they’re steadily climbing Eddies. In fact, you’ll find that all three — as well as the PowerShares Dynamic Retail ETF (PMR) and Direxion Daily Retail Bull 3X Shares (RETL) leveraged fund — have outdone the S&P 500 since I last discussed retail ETFs’ virtues around this time last year.
The “steady” part of the equation for these ETFs is partially thanks to their diversified nature. Rather than sitting on one stock and letting that shoot toward the sky or bottom out, you’re instead invested in anywhere from 25 stocks (RTH) to 97 (XRT),
But also helping these funds out is the fact that they’re mostly well shielded from many of the more fickle, smaller, specialty retailers that have been crashing and burning for the past few months.
A quick look at the most prominent funds:
SPDR S&P Retail ETF (XRT)
XRT holds a number of typical “mall” stores — Foot Locker (FL), Men’s Wearhouse (MW), TJX Cos. (TJX) and the like — but also other retailers such as Amazon (AMZN) and Advance Auto Parts (AAP), and even companies you wouldn’t associate with retail, including Netflix (NFLX) and Priceline (PCLN).
More importantly, the fund is equally weighted, so no particular stock has a heavy effect on XRT’s performance. Heck, Rite Aid (RAD) is XRT’s biggest holding at just 1.63% of the fund.
Consumer Discretionary SPDR (XLY)
The Consumer Discretionary SPDR isn’t specifically geared toward retail like XRT is, so it’s at least leaning well away from the food court.
XLY also is cap-weighted, so it boasts 5%-plus holdings in larger retailers like Amazon and Home Depot (HD), as well as other discretionary (but non-retail) stocks such as Comcast (CMCSA) and Walt Disney (DIS).
Market Vectors Retail ETF (RTH)
Meanwhile, RTH is extremely heavily weighted in larger, more stable companies — Amazon, Walmart (WMT), Home Depot, Walgreen (WAG) and CVS Caremark (CVS) make up a whopping 35% of the fund. So, yes, you’re overweight in a few companies, but they’re at least stocks you can depend upon not to drop 20% at the drop of a hat.
Click to Enlarge Investors have every reason to be scared of retail right now. Stocks are dropping like flies, and the data that’s pouring in doesn’t bode very well for many of the sector’s biggest names. And, in fact, those woes could even pour over into the Amazons and Walmarts of the world.
Meanwhile, a couple of these funds are toying with near-term technical support, and any breaks could spur additional selling.
So rather than buying near the top right now, you might consider waiting for even deeper discounts than the 2% to 3% these funds have shed in the past few days.
But long-term, retail ETFs are a great buy for anyone even remotely optimistic about the U.S. economy. So dig in.
Kyle Woodley is the Deputy Managing Editor of InvestorPlace.com. As of this writing, he was long XRT. Follow him on Twitter at @IPKyleWoodley.