Retail ETFs Show Mixed Results Ahead of Black Friday

November 23, 2022

Retail-focused exchange-traded funds are on a roller coaster ahead of the holiday spending spree, as analysts caution of significant headwinds to the sector.  

What’s traditionally known as the strongest time of year for retailers may take a turn as continuing supply chain issues, decades-high inflation and dropping consumer confidence contribute to a bleaker outlook for some big companies.  

Online retail behemoth Amazon.com Inc. projected the slowest holiday-quarter growth in its history, while the National Retail Federation predicted holiday sales may grow at a significantly slower pace than last year.  

“Even though we saw a decline, inflation is still very high when you’re talking above 7%, close to 8%,” said Aniket Ullal, CFRA’s head of ETF data and analytics, in an interview with ETF.com. “Consumers are cutting back on discretionary purchases.” 

While U.S. retail sales rose 1.3% month over month in October amidst rising inflation, Ullal pointed to the decreased spending in consumer discretionary purchases, noting the difference in earnings results between companies like Target Corp. and Walmart Inc.  

Essential Holiday Quarter 

Minnesota-based Target posted weaker-than-expected third-quarter profits Nov. 16, citing an "increasingly challenging environment" as American households were squeezed by soaring inflation. The lackluster news sent the company’s stock plunging 13% as it cautioned investors of a softer holiday season and slashed forecasts for an essential holiday quarter.  

Meanwhile, Arkansas-based Walmart, known as a key provider for consumer staples, raised its financial outlook for the year after domestic same-store sales in the third quarter rose 8.2%.  

For Brian Mulberry, client portfolio manager at Zacks Investment Management, the trend can be attributed to how companies like Target and Amazon are “retraining their customer base.” 

“If customers learn that all they have to do is wait a couple of months and they can buy it substantially cheaper, then they'll do that,” he said, referring to the shopping bonanza spurred by excess inventory for large retailers.  

“Once you change consumer behavior, it's very difficult to correct and cut back,” Mulberry added.  

Retail ETFs have consequently posted a mixed bag of results on the news, with the SPDR S&P Retail ETF (XRT) and the VanEck Retail ETF (RTH) down 27% and 13% year to date, respectively.  

The S&P Retail Select Index has similarly slumped 28% during the same period, despite all three names having a brief upward rally for the last month, in line with the rest of the equity market. 

ETFs focused on online retailers, like the Amplify Online Retail ETF (IBUY), have tumbled 52% in the last year.  

“What we've seen is actually fairly typical of what you would expect in this kind of environment,” Ullal said. 

Contact Shubham Saharanat[email protected]  

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