5 Retail ETFs to Browse Before Black Friday

by Kyle Woodley | November 21, 2012 8:50 am

Black Friday is just days away, and that means two things:

  1. Several people are just days away from becoming YouTube sensations by fist-fighting over a 46-inch Panasonic.
  2. You’ve already been bombarded[1] by a number[2] of “Buy retail!”[3] stories pegged to[4] (you guessed it) Black Friday[5].

But as kitschy as it might seem, don’t sneer — there are some numbers behind the hysteria.

Consumer spending and consumer confidence trends are looking up[6] heading into the all-important holiday season. Retailers are pretty confident, too, with 36% of businesses expecting to add more holiday payroll[7] this year than in 2011.

Also, FactSet recently released its own rosy pre-Black Friday report[8]: It expects a boffo Q4 for retail, and it says 10 of the S&P 500’s 13 retail sub-industries will see earnings growth in the period, including huge advances in apparel retail (27.5%), drug retail (18.1%) and specialty stores (11.7%).

And wouldn’t you know it? The past few years have shown Black Friday really is a decent time for investors to jump into retail.

Broadly speaking, the November-March period has been especially kind to retail stocks of late. The table below shows the performance for five retail ETFs (including the leveraged RETL) and the S&P 500 for the past few November-March and April-October periods:

Why the outperformance? Perhaps because between November and March retail stocks have two primary drivers: Black Friday excitement (and all the data leading up to it), then the reporting of the all-important Q4 numbers, usually between February and March.

That said, this is Nov. 21, not Nov. 1. How do the numbers look for people who bought in around Black Friday and held through March?

The difference in returns isn’t as exaggerated, but there’s clearly still a sweet spot — which means you still have time to get in.

But how?

Many will suggest throwing the proverbial darts — heck, FactSet itself says Urban Outfitters (NASDAQ:URBN[9]) is set to nearly double its earnings year-over-year and that Abercrombie & Fitch (NYSE:ANF[10]) and Gap (NYSE:GPS[11]) will celebrate banner quarters.

But if you’re not willing to take a gamble on whose cami sweater will go bonkers this season (and I’m not), you might be better off making a diversified bet on the whole retail enchilada with a retail ETF. And with a good number of them out there, you can tailor your pick to your tastes.

Here’s a closer look at the five ETFs we discussed above:

SPDR S&P Retail ETF (NYSE:XRT[12])

This is about as “safe,” diversified and true as a retail play gets. The XRT tracks an equal-weighted index of retail stocks. That means rather than one stock making up 10% of the fund, then another 5%, and another 0.2%, and so on, all stocks have a (very close to) equal effect on the fund’s performance.

XRT has 94 different retail holdings, which further spreads out the risk. About 75% are “cyclical” consumer stocks like OfficeMax (NYSE:OMX[13]), GameStop (NYSE:GME[14]) and Abercrombie, though it also holds defensive stocks like Kroger (NYSE:KR[15]) and The Fresh Market (NASDAQ:TFM[16]).

Expense Ratio: 0.35%

Consumer Discretionary Select Sector SPDR (NYSE:XLY[17])

The XLY is a much less direct play on retail, with about 40% of the fund dedicated to the sector. Instead, you also get heavy exposure to media stocks (31%) and hotels/restaurants/leisure (16%), as well as splashes of other sectors.

Also unlike XRT, the Consumer Discretionary SPDR is not equal-weighted. Of XLY’s 80 holdings, five — Comcast (NASDAQ:CMCSA[18]), Home Depot (NYSE:HD[19]), Walt Disney (NYSE:DIS[20]), McDonald’s (NYSE:MCD[21]) and Amazon (NASDAQ:AMZN[22]) — account for 32% of the fund’s weight. Of course, those are five really solid companies. Also note that XLY is the cheapest of the five funds listed here.

Expense Ratio: 0.18%

PowerShares Dynamic Retail ETF (NYSE:PMR[23])

The PMR holds only 30 stocks, but its weightings aren’t terribly lopsided. Most of the PowerShares fund’s holdings read like a mall directory, and Walmart (NYSE:WMT[24]) is a top-five weight at 5%. However, PMR’s top three holdings — CVS Caremark (NYSE:CVS[25]), Kroger, Costco (NASDAQ:COST[26]) — aren’t exactly the hottest spots around the holidays.

Dubiously, PMR has been the worst performer among the four regular equity funds listed here, while also being the most expensive (almost double the cost of the XRT and our next ETF).

Expense Ratio: 0.63%

Market Vectors Retail ETF (NYSE:RTH[27])

This took the place of the same-tickered HOLDRS ETF[28] back in December 2011, so it doesn’t have much of a track history. A bet on RTH might as well be a bet on Walmart, Home Depot and Amazon, which make up a whopping 36% of the fund. WMT itself accounts for 14%!

It’s the most defensive of these ETFs, split 45/45 between cyclicals and defensives, and the rest is in (of all things) healthcare stocks like McKesson (NYSE:MCK[29]) and Cardinal Health (NYSE:CAH[30]). It’s also a small fund, at just $14 million in assets under management.

Expense Ratio: 0.35%

Direxion Daily Retail Bull 3X Shares (NYSE:RETL[31])

This is by far the riskiest play on retail. The RETL is a leveraged fund that seeks to return 300% of the performance of the Russell 1000 Retail Index, which is led by HD, AMZN, Costco, Target (NYSE:TGT[32]) and others. Simply put — if retail does well, RETL will absolutely juice your returns. If it doesn’t, you’re smoked.

Either way, before you ever touch a leveraged ETF, check out the risks[33]. (And realize that Direxion will take its pound of flesh, with expenses of more than 1%.)

Expense Ratio: 1.07%

Kyle Woodley[34] is the Assistant Editor of InvestorPlace.com[35]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @IPKyleWoodley[36].

  1. been bombarded: http://wire.kapitall.com/investment-idea/macys-a-growth-stock-for-your-black-friday-radar-screen/
  2. a number: http://www.stockpickr.com/5-retail-trades-black-friday.html
  3. “Buy retail!”: http://www.stockpickr.com/5-retail-trades-black-friday.html
  4. pegged to: https://investorplace.com/2012/11/the-one-retailer-to-own-our-experts-weigh-in/
  5. Black Friday: http://247wallst.com/2012/11/20/black-fridays-improbable-winners/
  6. are looking up: http://slant.investorplace.com/2012/11/consumer-spendingcould-make-2013-a-breakout-year-for-stocks/
  7. add more holiday payroll: http://slant.investorplace.com/2012/10/holiday-sales-more-seasonal-jobs-are-coming-to-town/
  8. rosy pre-Black Friday report: http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_11.16.12
  9. URBN: http://studio-5.financialcontent.com/investplace/quote?Symbol=URBN
  10. ANF: http://studio-5.financialcontent.com/investplace/quote?Symbol=ANF
  11. GPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPS
  12. XRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=XRT
  13. OMX: http://studio-5.financialcontent.com/investplace/quote?Symbol=OMX
  14. GME: http://studio-5.financialcontent.com/investplace/quote?Symbol=GME
  15. KR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KR
  16. TFM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TFM
  17. XLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLY
  18. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  19. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  20. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  21. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  22. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  23. PMR: http://studio-5.financialcontent.com/investplace/quote?Symbol=PMR
  24. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  25. CVS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVS
  26. COST: http://studio-5.financialcontent.com/investplace/quote?Symbol=COST
  27. RTH: http://studio-5.financialcontent.com/investplace/quote?Symbol=RTH
  28. same-tickered HOLDRS ETF: http://investwithanedge.com/van-eck-launches-new-etfs-to-replace-six-delisted-holdrs
  29. MCK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCK
  30. CAH: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAH
  31. RETL: http://studio-5.financialcontent.com/investplace/quote?Symbol=RETL
  32. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  33. check out the risks: https://investorplace.com/2012/03/the-triumphs-and-troubles-of-trebles/
  34. Kyle Woodley: https://www.investorplace.com/author/kyle-woodley/
  35. InvestorPlace.com: https://investorplace.com/
  36. @IPKyleWoodley: https://twitter.com/#!/ipkylewoodley

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