Why This Retail ETF Doubled Its Assets In A Week

January 12, 2017

From a flows perspective, 2017 has been a good year so far for the SPDR S&P Retail ETF (XRT). In the past five trading sessions, the ETF picked up $350 million in new assets, more than doubling its total assets under management to $624 million.

Ordinarily, that might be big news. However, a look under the hood reveals XRT routinely has large fluctuations in the amount of assets that it holds. Some of it has to do with changes in the prices of the ETF's underlying holdings―which can be volatile―but most of it has to do with big traders quickly coming in and out of the fund.

Some ETFs are used by investors (think Vanguard funds, which are held for years), and some are used by traders, which are held for much shorter time periods. XRT is the latter.

Assets in the fund fell below $300 million at the end of last year, tripled to almost $900 million a few days later and then edged modestly lower to over $600 million. Clearly, someone is making big bets on retail and using XRT as the vehicle to do so.

XRT Assets Under Management

Source: Bloomberg

A Volatile Industry

It's understandable why retail stocks would be a focus for traders. The group swings around wildly based on the ever-shifting outlook for the domestic economy and changing profit expectations for individual companies.

Retailers shot higher in November and early December amid speculation that Trump's victory would be a boon for the U.S. economy, spurring consumers to spend more.

But then reports of tepid holiday sales began trickling out, dampening enthusiasm for the group. Last week, Macy's, Kohl's and Barnes & Noble reported disappointing sales figures for the holiday season, fueling selling across the retail industry.

Adding to the confusion, research firm Adobe Digital Insights reported a few days ago that online retail sales surged 11% year-over-year during the November through December holiday period to a record $91.7 billion. Incidentally, e-commerce giant Amazon.com accounted for the bulk of those sales―38%, according to a separate report from Slice Intelligence―far ahead of second-place Best Buy's 3.9%.

 

XRT Vs. RTH

The good-news-one-day, bad-news-another cycle is great for traders looking for swings, and may be what attracts them to retail ETFs such as XRT.

The fund holds all retail stocks across the U.S. market and equal-weights them, giving small and midsize companies a much greater weighting than they would otherwise have. In XRT's portfolio, a retail giant such as Amazon has the same weighting as Shutterfly, a tiny company by comparison. Additionally, struggling apparel stocks are the largest subindustry in XRT's portfolio, accounting for a quarter of the fund.

Those two factors make XRT a volatile fund, ripe for trading. However, for investors less concerned about swings and more interested in long-term performance, XRT isn't necessarily the best option.

The VanEck Vectors Retail ETF (RTH), the second-largest retail fund, with almost $100 million in assets, has handily outperformed XRT in the past five years. In the same time that XRT rose by 78%, RTH climbed 119%.

5-Year Returns For XRT, RTH

RTH's outperformance stems from its index, which tracks a market-cap-weighted basket of the 25 largest U.S.-listed retailers, a top-heavy approach that contrasts sharply with that of XRT. In fact, Amazon alone makes up 15.8% of RTH's portfolio, while the top 10 holdings combined account for 63% of the fund's portfolio.

RTH's methodology has served it well in the past few years, as top holdings such as Amazon, Home Depot and Lowe's rocketed higher. There's no guarantee RTH will continue to outperform, but it's a unique option worth considering for retail investors.

 

Two New Offerings

Indeed, retail ETFs is an area where no two funds are the same. In addition to XRT and RTH, there are the Direxion Daily Retail Bull 3x Shares (RETL)―a leveraged product―and the multifactor PowerShares Dynamic Retail Portfolio (PMR).

There are also two new offerings that launched just last year. The Amplify Online Retail ETF (IBUY) holds a basket of global retail stocks that derive most of their revenues from online sales, something that may appeal to investors who believe that an increasing share of retail sales will be online.

Meanwhile, the First Trust Nasdaq Retail ETF (FTXD) is another multifactor product that focuses on low volatility, value and price appreciation.

The table below contains the six retail ETFs currently available on the market and key information about them.

Retail ETFs

Ticker Fund Issuer Expense Ratio AUM Segment
XRT SPDR S&P Retail ETF State Street Global Advisors 0.35% $623.88M Equity: U.S. Retail
RTH VanEck Vectors Retail ETF Van Eck 0.35% $97.55M Equity: Global Retail
RETL Direxion Daily Retail Bull 3x Shares Direxion 0.96% $35.78M Leveraged Equity: U.S. Retail
PMR PowerShares Dynamic Retail Portfolio Invesco PowerShares 0.63% $21.36M Equity: U.S. Retail
IBUY Amplify Online Retail Amplify 0.65% $5.59M Equity: Global Retail
FTXD First Trust Nasdaq Retail ETF First Trust 0.60% $1.96M Equity: U.S. Retail

 

At the time of writing, the author did not own any of the securities mentioned. Contact Sumit Roy at [email protected].

 

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