David Trainer: The holiday season is upon us, which means all eyes are going to be on the retail sector for the next few weeks. One-fifth of all retail spending in the U.S. happens during the holidays. For some retailers the period between Thanksgiving and Christmas can account for 40% of their yearly revenue. ETFs can be a good, low cost way to get exposure to the retail sector.
Just like Santa, New Constructs keeps track of everything these ETFs are up to, and we’ve made our list and checked it twice. Our predictive rating for ETFs is based on total annual costs and our stock ratings of their holdings. Our analysts dig through the financial footnotes of over 3,000 Form 10-K’s a year, so we’ve done our due diligence on the holdings of the ETFs we cover.
Let’s see which retail-focused ETFs have been naughty or nice.
Naughty: Direxion Daily Retail Bull 3x Shares (NYSEARCA:RETL)
RETL is getting a lump of coal in its stocking for holding bad stocks and charging investors high fees. 61% of the stocks held by RETL earn our Neutral-or-worse rating. What’s worse, RETL charges total annual costs of 1.06% to investors, the highest of any of the 184 sector ETFs we cover.
In addition, RETL’s leveraged triple long strategy, which seeks to return 300% of the Russell 1000 Retail index every day, can be risky for investors. If retail sales fall short, RETL can be hit hard, as it was last year when it lost 12% of its value during the month of December. RETL has returned 122% to investors so far this year, but its poor holdings, high fees, and risky strategy give it too much downside potential for the holiday season.
Naughty: Market Vectors Retail ETF (NYSEARCA:RTH)
RTH, at least, charges low fees to investors, but its holdings are still not up to snuff. Like RETL, 60% of the stocks held by RTH earn our Neutral-or-worse rating. RTH lands itself on the naughty list and earns our Dangerous rating.
Lump Of Coal in RETL and RTH
Amazon (NASDAQ:AMZN) is one of my least favorite stocks held by RTH and RETL and earns my Dangerous rating. As I highlighted back in May, the growth expectations implied by AMZN’s stock price are immense. AMZN’s current valuation of ~$388/share implies 25% growth in operating profit (NOPAT) for the next 20 years. The issue for AMZN is its NOPAT margin, which has declined from 7% in 2004 down to 1% last year. Now that AMZN is no longer the only game in online retail, it has to keep prices down to stay competitive, which limits its profit growth potential. AMZN can keep growing revenues all it wants, but without profits it can’t create value for shareholders.
AMZN is the largest of holding of both RTH and RETL. It makes up 9% of RTH’s assets and 15% of RETL’s.