Big Differences In 3 Biggest Retail ETFs

November 10, 2017

Most people are well aware of the woes affecting the retail industry. Brick-and-mortar retailers like JCPenney, Macy's and Target have been battered due to disappointing sales and increasing competition from online retailers such as Amazon.

Many of these companies—which have been around for decades in some cases—have seen their share prices decline by more than half in the past year alone.

Now with the all-important holiday shopping season swinging into full gear, investors are wondering whether there's opportunity in the beaten-down industry and if so, how best to capitalize on it.

Americans Eager To Spend

One thing that's certain is that the troubles facing retailers has nothing to do with Americans' appetite to spend. Consumers in the country are usually eager to reach into their wallets and buy things, especially during the holidays, a period that accounts for about 20% of retailers' total sales for the year.

That appetite to spend is likely to continue in 2017. According to a survey from the National Retail Federation (NRF), consumers may spend an average of $967.13 this year during the holiday shopping season. Total retail sales (excluding automobiles, gasoline and restaurants) during the months of November and December may increase 3.6-4% from last year to as much as $682 billion.


Source: National Retail Federation


If that comes to fruition, it would mark the fastest growth in holiday retail sales since 2014, when they jumped 5%.

“Although this year hasn’t been perfect, especially with the recent devastating hurricanes, we believe that a longer shopping season and strong consumer confidence will deliver retailers a strong holiday season," said the NRF CEO Matthew Shay.

Online Eclipses In-Store

The NRF's survey includes all retailers, whether it be brick-and-mortar or online. That's why it paints a rosy picture for holiday sales even as many retailers with physical stores struggle.

In fact, the NRF forecasts that online will become the most popular destination for holiday shopping for the first time ever in 2017, with 59% of consumers responding that they will make purchases on the web this year.

That surpasses department stores, where 57% of consumers are expected to shop; discount stores, where 54% of consumers may shop; and supermarkets, where 46% of consumers say they will shop.

Online sales are also anticipated to grow much faster than overall retail sales this season. According to market research firm eMarketer, e-commerce sales may jump by 15.8% during the holiday season.

Those rapid rates of growth may continue for the foreseeable future as online sales still only account for about one-tenth of total retail sales.

Amazon's Dominance

There are many companies benefiting from the growth in online shopping, but one company is far and away the leader: Amazon. Sales at the online retailer accounted for 38% of all e-commerce sales during last year's holiday shopping season, and some estimates suggest the company's share could rise to as much as 44% this year.

Amazon's dominance has not been lost on investors. Shares of the company are up 50% this year and 400% over the past five years. The stock has rallied so sharply that it's been the make-or-break factor for two of the biggest retail ETFs.

The largest fund in the space, the $419 million SPDR S&P Retail ETF (XRT), is down 8.9% this year, compared with a 9.2% gain for the $51 million VanEck Vectors Retail ETF (RTH). Over the past five years, the difference is even starker: XRT is up 38.5%, and RTH up 104.8%.

20% Of Portfolio

What’s the biggest factor driving the divergence? Amazon. The online juggernaut represents 20% of RTH's portfolio, compared with a little over 1% for XRT.

That's by design. RTH holds a market-cap-weighted basket of the 25 largest U.S.-listed retailers. XRT holds an equal-weighted basket of all retailers in the S&P Total Market Index.

Of course, Amazon isn't the only stock driving the divergence. RTH's outsized positions in other retail juggernauts that have been successfully muscling their way into the online space—such as Home Depot and Walmart—have also served it well.

At the same time, RTH holds only tiny positions in stocks of struggling department stores such as Macy's and Kohl's.


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