2 Retail ETFs For A ‘Big Box’ Comeback

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

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Senior ETF Specialist
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Reviewed by: Paul Britt
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Edited by: Paul Britt

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:

RTHWtXRTWt
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 Corporation7.5%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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one_yr_rtns_XRT_RTH

XRT’s heavy tilt toward smaller firms cuts both ways: If small-caps come roaring back, a good chunk of XRT will be along for the ride.

Maybe that’s why XRT’s returns are more volatile than RTH’s since the latter’s inception almost three years ago.

Volatility
RTHXRT
11.8%15.4%

 

 

 

ETF.com data and calcs.

Std deviation of LN return of daily TR NAV, annualized. 12/21/2012-11/12/2014

The Checkout Basket

In short, both funds will do well if UBS is right about the effects on retailers of a stronger dollar.

RTH captures the big retail names we all know, and in weights proportional to their market footprint. It also has decent assets and liquidity. XRT is unquestionably the trader’s choice, but leans hard toward smaller retailers, which makes it riskier.


At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected].

 

Paul Britt, CFA, is a senior analyst in the ETF Analytics group at FactSet, a team that maintains and develops an industry-leading suite of ETF-related data and analytics products. Prior to joining FactSet in April 2015, he was a senior analyst at etf.com, where he performed a similar role, and worked in private placement at Pensco Trust. Paul holds a B.S. from RIT and an M.S. in financial analysis from the University of San Francisco.