2 Retail ETFs For A ‘Big Box’ Comeback

November 19, 2014

Falling gas prices and a strong buck may boost retail stocks, but the favorite ETF may not be the best play.

As gas prices drop, U.S. consumers will have more money to spend at places like Walmart. Meanwhile, a strengthening dollar makes the cost of imported goods on the shelves that much cheaper. Higher revenue and lower costs equal retail “cha-ching.” That’s the thesis offered by UBS in a recent Barron’s piece.

Retail ETFs are explicitly mentioned in the article as a way to play this thesis, which is great. But as is often the case, the SPDR S&P Retail ETF (XRT A-49) is the only fund to get any love.

And I understand why. XRT has huge assets and trades incredibly well. It has a strong options market too, making it ideal for short-term bets with much less capital.

Where’s Walmart?

Still, XRT has much less exposure than you might think to retail giants like Walmart. The fund’s equal weighting greatly suppresses the impact of the giant retailer. In fact, Walmart makes up only about 1 percent of the fund.

In contrast, a competing retail fund, the Market Vectors Retail ETF (RTH | A-52), has more than 10 percent of its assets in Walmart. Here’s how the top five holdings for each fund stack up:

Walmart Stores, Inc. 10.6% Homeaway, Inc. 1.1%
Amazon.com, Inc. 9.2% RentACenter, Inc. 1.1%
Home Depot, Inc. 8.0% Casey's General Stores, Inc. 1.1%
CVS Health Corporation 7.5% American Eagle Outfitters, Inc. 1.1%
Costco Wholesale Corp. 5.0% Burlington Stores, Inc. 1.1%

ETF.com data 11/12/2014

For beefy exposure to top retailers, RTH is tough to beat. One caveat: While U.S. firms dominate the portfolio (about 70 percent), RTH is global in nature, so leading Japanese and European retailers also have a place in the fund’s basket.

Equal Means Smaller

XRT’s equal weighting has another effect too: It pushes the ETF’s portfolio into small-caps. In fact, small-caps make up 38 percent of XRT by weight compared with zero percent for RTH, per ETF.com data.

This may explain why XRT’s performance has suffered next to RTH’s over the past 12 months ended Nov. 12, as small-caps have been struggling recently: XRT turned in 7.0 percent to RTH’s 13.1 percent.

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