Is It Time To Buy Retail ETFs? (RTH, PMR, XRT, COST, CVS, WAG, AMZN, HD, WMT)

e-commerce retail shopEric Dutram: With rising consumer confidence, steady job growth, recovering housing prices and lowering gas prices, the retail sector is poised to benefit from a broad recovery. Retailers are focusing on several technological improvements, inventory rightsizing, and enhancing efficiency and competence.

Further, cost-containment efforts and merchandise initiatives to improve margins are the top priorities. However, investors remain concerned about the impact of the implementation of higher taxes and the expiration of the payroll tax cut in the first half of the year that could curtail consumer spending, thereby increasing the threat of reducing retail sales.

Despite this concern, retail ETFs are gaining traction. The ETFs outperformed the broader market, as measured by the S&P 500, generating over 20% returns versus a gain of 16% for the S&P 500 (read: Guide to Retail ETFs).

These ETFs showed heavy volumes on better-than-expected retail sales for the month of December. Sales rose 0.5% from the prior month and 4.1% over the last year owing to increasing sales of cars and home furnishings.

Investors have a couple of choices in the retail space that could provide great opportunity in this rocky market environment. The sector can be a big beneficiary of broad recovery and can be one of the first sectors to jump when consumer confidence rises.

Below, we take a look at three interesting choices in this space. While all have some similarities, there are some key differences that investors should be aware of before making a final choice in this surging space:


Launched in January 2006, this ETF seeks to replicate the price and performance of the S&P Retail Select Industry Index, an equal weighted index. XRT is by far the largest and most popular fund in the retail space with AUM of $922 million and more than four million shares change hands every day.

With 98 securities in its basket, the fund offers wide diversification across individual holdings as no single firm makes up more than 1.5% of XRT. In terms of industry exposure, specialty retail accounts for nearly 62% of assets, while department stores and Internet/catalog retail account for another 22% combined.

The product concentrates more on small and medium cap companies rather than the larger ones (read: Mid Cap ETFs Leading the Market in 2013). Though the fund charges 35 basis points per year in fees from investors, expense ratio is the lowest in the category.

XRT has generated impressive returns of about 19% last year and 4.4% so far this year. Further, the product yields 1.59% in annual dividends.

Currently, XRT has a Zacks ETF Rank of 2 or ‘Buy’. This suggests that this product is expected to perform well over the long haul, when compared to other funds in the segment.

PowerShares Dynamic Retail Portfolio (NYSEARCA:PMR)

This fund tracks the Dynamic Retail Intellidex Index, which uses various investment criteria like price momentum, earnings momentum, quality, management action and value to include stocks in the list.

Launched in October 2005, the product holds 30 securities with AUM of $38.6 million. The fund is concentrated more on its top holdings as it puts more than 46% in top ten firms.

Walgreens (NSYE:WAG), CVS/Caremark (NYSE:CVS) and Costco Wholesale (NASDAQ:COST) enjoy the top three positions in the basket. Specialty retail accounts for nearly 52% of assets, while food retail and drug stores account for another 27% combined.

PMR maintains significant exposure to large cap and small cap companies. The ETF is the second most expensive fund in the space, charging 60 bps in fees per year. The fund trades with a small volume of over 24,000 shares per day, so total costs could be a bit higher (read:Dollar Cost Averaging with ETFs: Does It Work?).

The fund delivered return of 15% over last year and about 2.1% year-to-date. Additionally, the product yields a decent dividend of 2.26% annually. These returns could be higher if the economy continues to improve. For this reason, we give this fund a Zacks ETF Rank of 2 or ‘Buy’.

Market Vectors Retail ETF (NYSEARCA:RTH)

This fund, launched in December 2012, seeks to match the performance of the Market Vectors U.S. Listed Retail 25 Index, before fees and expenses. The ETF is focuses more on large cap and mid cap companies, with giant caps taking up most of the spots.

With 26 stocks in its basket, the product is not spread across individual securities as it invests 64.3% of the assets in top ten firms. Wal-Mart Stores (NYSE:WMT) occupies the top position in the fund with over 11% share, followed by (NASDAQ:AMZN) and Home Depot (NYSE:HD) with combined more than 18% of RTH.

About 31% of the portfolio goes to specialty retail companies while 40% goes towards hypermarkets, departmental stores and drug stores combined.

The fund trades with a volume of about 91,000 shares a day and has assets under management of $30.5 million. The fund charges an expense ratio of 35 basis points annually, which is the same as the retail ETF giant XRT. The product delivered a return of nearly 20% last year and has gained 3.5% since the start of the year. XRT pays a good dividend yield of 1.94%.

RTH currently has a Zacks Rank # 2 or ‘Buy’ rating. This indicates that the ETF would outperform its peers in the discretionary space over the long haul.

zacksWritten By Eric Dutram From Zacks Investment Research

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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