Holiday Shopping Not A Gift For All Retail ETFs

Dispersion in exposure and performance is evident among retail ETFs, even if they all benefit from strong holiday shopping.

CinthyaMurphy_200x200.png
|
Reviewed by: Cinthia Murphy
,
Edited by: Cinthia Murphy

Americans are doing a lot of holiday shopping this year, and more so online than ever. That could bode well for equity ETFs focused on retail names, particularly those offering the most exposure to online retailers.

Here are three key data points on how the holiday shopping season is shaping up this year, courtesy of Adobe Insights:

  • On Black Friday, Americans spent a whopping $3.34 billion on holiday shopping, some 21% more than a year earlier. What’s interesting about that figure is that about a third of that total was online shopping rather than people showing up at brick-and-mortar stores.
  • On Cyber Monday, shoppers spent another $3.39 billion—a record.
  • The month of November drove nearly $40 billion in online revenue, about 7.4% more than a year earlier.

Retailers like Amazon reported having their best Cyber Monday sales volume ever, but Amazon is not alone in capitalizing on the online-retail trend. Traditional retailers like Walmart, too, have reported significant jumps in online shopping through company apps.

Retail ETFs Diverse In Exposure

In the ETF space, tapping into the retail theme can be done through focused retail ETFs as well as through broader consumer discretionary funds. And as is the case with any other ETF segment, portfolios here are vastly diverse, as is performance.

Consider some “flavors” of retail ETFs in the market today and just how different they are:

  • The SPDR S&P Retail ETF (XRT), with $641 million in assets, is the largest and most popular in the space. XRT picks retail stocks from the broad S&P Total Market Index, and not from the S&P 500, which translates into more exposure to smaller-cap names—a tilt that has served it well, particularly in recent weeks.

The fund equal-weights its holdings, each of its 96 names currently representing just over 1% of the portfolio. It has an expense ratio of 0.35%.

XRT is a broad portfolio of the more traditional brick-and-mortar names. Among its top holdings are companies such as Office Depot, Children’s Place, Cabela’s, Kohl’s and Best Buy. This is a fund where you will find traditional retailers such as Walmart, but you won’t find names like Amazon.

  • The VanEck Vectors Retail ETF (RTH), with $100 million in assets, is the retail ETF with the largest allocation to Amazon, at about 17% of the portfolio. For comparison, XRT does not own Amazon at all. While RTH is global in scope, it tilts toward U.S. retail heavyweights like Amazon, Home Depot and Walmart.

RTH is also a far more concentrated play than XRT because it owns only 26 names—less than a third the size of XRT’s portfolio—and the stocks are weighted by market capitalization. The fund has a 0.35% expense ratio.

 

It, too, is alternatively weighted—it uses a tiered equal-weighting scheme—which translates into different tilts in exposure. For example, PMR’s largest holdings include Walgreens, Ross Stores and Kroger. It also includes food and drug retailers, not often associated with holiday “retail.” PMR has a 0.63% expense ratio.

  • The Amplify Online Retail ETF (IBUY), with $6 million in assets, is the newcomer in the space. Launched in April, the fund offers global exposure to online retailers. Stocks included in the portfolio must generate at least 70% of their sales online, and are weighted based on a tiered equal-weighting scheme.

Top holdings include Nutrisystem, PetMed Express, FTD, Etsy, Wayfair and Amazon, each at just over 3% of the mix. Also in this portfolio is Chinese retailer giant Alibaba Group, at 1.3% weighting. IBUY comes with a 0.65% expense ratio.

Performance Drivers

Given the vastly different collection of holdings and weighting schemes, it’s not surprising that these four funds are delivering very different results. The chart below shows that disparity (note that IBUY came to market in April, so it has no Q1 performance):

 

Chart courtesy of StockCharts.com

 

What Drives Performance?

What may be surprising is that in this era of online shopping, XRT is outperforming RTH. That performance differential could be linked to three main drivers.

First, the fact that XRT allocates to some smaller-cap names, which have done really well, particularly in recent weeks following the U.S. presidential election. XRT’s portfolio has a weighted average market cap of about $18.5 billion, which compares with $117.2 billion for RTH.

Secondly—and surprisingly, perhaps—is that XRT may be benefiting from excluding a company such as Amazon, which represents some 17% of RTH. Amazon stock prices have been under pressure recently despite strong holiday sales, because the overall numbers, while strong, are being perceived as relatively disappointing for such a company. In fact, on Cyber Monday, as sales surged, Amazon stocks dropped about 1.7% in value. So far in 2016, Amazon is up about 9.6% YTD.

And finally, the funds’ different weighting schemes—equal versus market-cap-weighted. A nonperforming stock in RTH drags down returns far more than in XRT.

All of this is a good reminder that it’s always prudent to look under the hood in an ETF portfolio to make sure you know what you are getting. No two retail ETFs are alike. Check out a complete list of U.S. retail ETFs, or more broadly, consumer discretionary ETFs, before picking the right retail ETF for you.

Contact Cinthia Murphy at [email protected]

 

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.