How To Occupy Mall Street With Retailing ETFs (XRT, PMR, RTH, WMT, AMZN)

Ron Rowland: As protesters “occupy” Wall Street, Americans are considering how — or if — they’ll be able to occupy the space under this year’s Christmas tree.

Christmas? It’s not even Halloween yet! I know, but retailers are entering the make-or-break part of the year. So are ETFs focused on consumer-oriented sectors. Today we’ll look at how to enhance your holidays with the right ETF picks.

Retail Sales Reports: Mixed Bag

Obviously we have serious economic problems right now. If you spend a lot of time looking at headlines or reading blogs, it’s easy to get wrapped up in the negativity.

But I think it’s important to remember two things …

First, what people do is more important than what they say. You can ask people a general question like “How do you feel about your financial position” and get plenty of discouraging responses, especially from those who spend $20 a day on gourmet coffee and fast food.

Guess which household spends more money?
Guess which household spends more money?

Second, most consumer spending comes from a relatively small part of the population. If only 20 percent of consumers are spending freely, a business that caters to them can prosper.

With that in mind, let’s look at the latest data from the U.S. Census Bureau. Total retail and food services spending jumped 7.9 percent between September 2010 and September 2011. That sounds good, but let’s drill down and see why:

  • Gasoline stations saw their sales jump 20.3 percent in this period. That’s the impact of higher gasoline prices.
  • Motor vehicle dealer sales rose 8.8 percent.
  • Clothing and clothing accessories … up 7.6 percent.
  • Restaurant and bar sales were up 6.9 percent.
  • “Nonstore retailers,” which includes online-only merchants like Amazon (NASDAQ:AMZN), grew their sales by 10.1 percent.
Consumers are spending more at the pumps.
Consumers are spending more at the pumps.

Now the not-so-good categories:

•  At furniture stores, sales rose only 3.2 percent.

•  Electronics and appliance stores had no growth at all: Zero percent.

•  Department stores had anemic sales growth of only 1 percent.

Where is the growth? Based on this report, it looks like people with spending money are most interested in cars, clothing, and eating out. Electronics and furniture? Not so much. Consumers may be getting more for each buck as prices drop, but overall spending is stagnant.

As I explained last year in my Consumers on a Shopping Spree column, there’s a distinction between staples and discretionary items. Yet the lines are getting blurry.

What can you do?

Answer: Evaluate each ETF from this sector on its own merits, which is exactly what I do for my International ETF Trader members. You can’t just buy one with “consumer” in its name. Here are three examples of different approaches within the retailing segment:

SPDR S&P Retail (NYSE:XRT) takes the broad-based view. The underlying index draws from the retail components of the S&P U.S. Total Market Index.

XRT investors get an equal-weighted portfolio of the 100 or so largest publicly-traded domestic retailers. A luxury store like Saks (SKS) has about the same allocation as the working man’s Wal-Mart (NYSE:WMT).

If you think Saks is likely to outperform Wal-Mart, or vice versa, then XRT may not be what you want. But when you figure that these two companies are really not in competition with each other, then having both makes more sense.

PowerShares Dynamic Retail (NYSE:PMR) takes a different approach. It follows a “quantitative” index that evaluates retail stocks based on criteria like fundamental growth, valuation, investment timeliness, and risk factors. The portfolio is built from the companies with the highest scores.

The PMR strategy can adapt to changing trends faster than a passive index-based product like XRT. This isn’t always an advantage and can even work against you at times. In addition to its flexibility, another big advantage of this methodology is cost. Computerized stock-picking is much less expensive than a human portfolio manager.

Some HOLDRS won't live here much longer.
Some HOLDRS won’t live here much longer.

Retail HOLDRs (NYSE:RTH) is another one to look at. This may surprise regular readers who are aware I don’t like the way Merrill Lynch designed the HOLDRS structure. But when the facts change, I’m willing to change my mind …

A few weeks ago Merrill Lynch struck a deal with Van Eck to transform six HOLDRS into new Van Eck ETF products. Once this happens — which is supposed to be before the end of the year — most of my HOLDRS objections will go away.

The new, improved RTH will track an index of 25 U.S.-listed companies that derive most of their revenues from retailing. RTH will be a concentrated portfolio of large-cap retail stocks, representing the top national chain stores.

Ultimately, of course, all three of these ETFs depend on consumer spending patterns. All could suffer in the worst-case scenarios. I’m listing them because — sooner or later — consumer stocks will be back!

Best wishes,

Written By Ron Rowland From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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