Looking for the best ETFs to buy is no simple task, given the diverse nature of exchange-traded funds.
There are ETFs that focus on global stocks, ETFs that focus on sectors and subsectors, ETFs that focus on commodities instead of stocks … how do you choose?
Well, the simplest path is to just take the most compelling macroeconomic data point of the moment and find the best ETF to buy based on the best way to play that trend.
And to me, the most compelling data point this week is the rebound in retail sales — leading investors to the SPDR S&P Retail (ETF) (NYSEARCA:XRT) as a result.
First, let’s talk retail, then we’ll talk about why I like the XRT over the alternatives.
Retail Sector and Spending Look Good
The last three months of retail sales have been disappointing, worrying investors in the sector. But retail sales rebounded in March for the first time in four months — thanks in part to strong auto sales, and firm spending data.
Specifically, retail sales rose 0.9% on a seasonally adjusted basis, marking the strongest gain in a year. Yes, the increase missed expectations slightly, but other details look strong, including car sales that popped up to an annual rate of 17.1 million — pushing levels not seen in 10 years.
Click to Enlarge Economists have predicted that the stronger sales should continue across the second quarter of the year, in part because of strong sentiment for consumers as well. Remember, while retail sales have been rolling back slightly in 2015, the long-term trend for consumers is decidedly optimistic. Consider this one-year chart regarding the University of Michigan Consumer Sentiment Index, showing that recent softness cannot offset long-term gains in consumer confidence.
And if analysts are correct that this recent strength in March retail sales will continue, there’s a lot of reason to be optimistic about the retail sector going forward despite a disappointing start to 2015.
Buy the XRT Retail ETF
Strangely enough, the SPDR S&P Retail (ETF) (NYSEARCA:XRT) hasn’t been dead money in 2015 despite challenges to retail sales broadly. In fact, it’s actually up 5% to outperform a flat market.
This hints that investors have been optimistic about the future despite short-term challenges. And now that this retail ETF has taken a breather for about a month, without much movement higher and on much lower volume, now could be a great opportunity to jump in and ride this retail ETF higher across the next several months.
This fund is well-diversified, with no position representing more than 1.25% of the portfolio, and holds plenty of smaller and specialized stocks like the $2.5 billion Asbury Automotive Group Inc. (NYSE:ABG) along with the big names in traditional retail you’d recognize like Target Corporation (NYSE:TGT) and Macy’s, Inc. (NYSE:M).
Think of this more of a consumer discretionary fund than just a list of big-box stores — and thus a play on all spending.
Click to Enlarge I recommend a six-month target of $120 for this retail ETF, or roughly 20% upside, with a stop-loss of $92. As you can see from the chart, XRT has been powering higher steadily since Thanksgiving, and I expect a good run to continue into the second half of this year. We can always reassess before the all-important holiday shopping season, but now seems a good time for a swing trade before all investors get retail on the brain again as they tend to do around Black Friday.
There are obviously other ways to play retail, but the diversification of XRT is a great way to ensure you don’t miss out on this broad trend by picking a stock that doesn’t make the most of this environment.
As for competitors’ ETFs, they can’t hold a candle to XRT — not its affordable expense ratio of 0.35%, or $35 per year on $10,000 invested, and not its impressive $1.4 billion in assets. The closest other ETF would be the Market Vectors Retail ETF (NYSEARCA:RTH), but this fund is not only more expensive but also less diversified with a massive 9.6% stake in Wal-Mart Stores, Inc. (NYSE:WMT) alone right now, and another 8.9% in Amazon.com, Inc. (NASDAQ:AMZN)!
If you want to cash in on resurgent retail sales over the next few months after a slow start to the year, look to the XRT ETF with a target of 20% upside.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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