Nice: PowerShares Dynamic Retail (NYSEARCA:PMR)
PMR makes it onto the nice list with a Neutral rating. 72% of the stocks held by PMR earn a Neutral-or-better rating. Its total annual costs of 0.66% are on the high end for an ETF but not as offensive as many others. Since only three out of the 184 ETFs we cover currently earn an Attractive rating, Neutral is the best investors can hope for in most sectors.
The biggest drawback for PMR is that it only has $39 million in assets. I recommend investors avoid any ETF with less than $100 million to ensure proper liquidity. PMR has nice holdings, but it’s not as good a choice for investors as the other entry on the nice list.
Nice: State Street SPDR S&P Retail ETF (NYSEARCA:XRT)
The biggest ETF on our list is also the nicest. With $1.4 billion in assets, XRT is more than ten times larger than the other three retail ETFs combined. 61% of its assets are in Neutral-or-better rated stocks, so its portfolio is not quite as strong as PMR. However, XRT’s total annual costs of 0.39% are lower. Our predictive rating gives both ETFs a Neutral rating, and in the end the superior liquidity of XRT gives it the edge.
The TJX Companies (NYSE:TJX) is one of my favorite stocks owned by XRT and earns my Attractive rating. While many brick and mortar retailers have struggled in recent years, TJX has thrived. The company has grown NOPAT by 12% compounded annually over the past decade. The recent relaunch of the online store for T.J. Maxx should provide a further boost to revenues.
TJX is not as cheap as some of its competitors, but the company’s strong financial results make the stock well worth its valuation. At ~$61/share, the market expects TJX to grow NOPAT by 10% compounded annually for the next six years. Six years is an awfully short growth appreciation period. If we give TJX credit for 15 years of growth at a slightly lower 8% growth rate, the stock is worth $84 today, a 38% premium to its current valuation.
The fact that XRT and PMR, our two top rated ETFs, only earn a Neutral rating is slightly disappointing. 20 out of the 124 retail stocks we cover (22% of the market cap) earn an Attractive-or-better rating. One would hope that at least one retail ETF could put together an Attractive portfolio. If you’re set on a retail ETF, XRT is our pick, but investors might be better off buying individual stocks like TJX instead.
More details on the retail sector are in our 4Q13 Best & Worst ETF in the Consumer Discretionary Sector report. You can see all our 4Q13 Best & Worst Sector Fund reports here. Our 4Q13 Sector Ratings are here.
Sam McBride contributed to this article.
Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, or theme.
This article is brought to you courtesy of David Trainer from New Constructs.