Retail ETFs Doing Better Than Expected

Trade wars, inverted yield curves and a slowdown in Europe may be fueling recession worries in the U.S., but those concerns haven’t manifested in the retail numbers. Recent government figures showed U.S. retail sales rose by more than expected in July, while several high-profile retail companies announced better-than-expected results for the latest quarter.

According to the Census Bureau, retail sales grew by 3.4% year over year in July and 3.1% for the year as a whole. Meanwhile, shares of retail giants like Walmart, Target, Home Depot and Lowe’s are trading near record highs after releasing strong earnings reports.

Some retailers are certainly struggling, especially department stores, but the tone surrounding the sector is noticeably more upbeat than you would expect with so many issues swirling about.

Mark Astrachan, lead retail analyst at Stifel, says retailers’ strength may be stemming from the strength in the U.S. consumer.

“The consumer wants to spend. Despite the volatility in the macro environment, it doesn’t seem to be having an impact so far,” he told CNBC. “Obviously, nobody can see what’s going to happen in the future, and retailers are all talking about some sort of future tariff impacts, but what we can see so far is that the consumer is quite healthy.”

Third-Best-Performing Sector

With consumer spending so strong, fueled by the most robust jobs market in decades, perhaps it shouldn’t be surprising that retailers are doing well this year. The sector most tied to retailers, consumer discretionary, is up 19.6% year to date, good enough for the third-best performance among broad stock market sectors, and better than the S&P 500’s 16.4% return.

The $14 billion Consumer Discretionary Select Sector SPDR Fund (XLY), which tracks the sector, has more than half of its portfolio in retail stocks. Top retail holdings include Amazon, Home Depot, Lowe’s, TJX and Target.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

XLY may be a good option for heavy exposure to retail stocks, but its holdings of hotels, restaurants and car manufacturers make it far from a pure play on the space. For more targeted exposure, there are other ETFs out there.

Weighting Scheme Matters

The largest of those is the SPDR S&P Retail ETF (XRT), a $303 million fund that holds an equal-weighted basket of retail stocks selected from the S&P Total Market Index.

Even though it boasts the most assets, XRT has been one of the worst-performing retail ETFs of the year, with a loss of 4.1%. The fund’s equal-weighting scheme hasn’t done it any favors. The retailers that have done well this year—large, dynamic firms with strong online footprints, like Amazon and Target—have the same presence in the fund as staid, dying companies like Office Depot.

Taking the opposite strategy of XRT is rival fund VanEck Vectors Retail ETF (RTH). This $64 million ETF holds a highly concentrated basket of the 25 largest U.S.-listed retailers and market cap weights them. 

The result is a portfolio heavy on top-tier retailers, including Amazon, Home Depot, Walmart, Lowe’s, Costco and Target. The top 10 holdings make up 73% of the fund, which has returned 17.3% so far this year.

Future: E-Commerce

Of course, the fact that retail as a whole is doing well this year doesn’t change the secular issue that’s been weighing on the industry for some time now; that is, the ascendance of e-commerce at the expense of brick-and-mortar.

The retailers that are outperforming are adapting to this new reality. Though they are not abandoning their traditional brick-and-mortar businesses, successful retailers like Walmart and Target are investing heavily in their online operations and tying them together with their physical stores, creating an omnichannel experience for consumers.

Others, like Wayfair, are undercutting their brick-and-mortar rivals with a purely online presence—essentially, the Amazon model.

No matter their strategy, the retailers doing the best right now and will likely continue doing well are those positioned for e-commerce growth. Online sales are growing at a 15% clip, five times faster than overall retail sales.

YTD Returns For Select Retail ETFs

Data measures total returns for the year-to-date period through Aug. 26.

Online Retail ETFs

A new crop of ETFs has arrived to take advantage of the digital trend in retailing. The largest of the bunch is the $262 million Amplify Online Retail ETF (IBUY), which is up 19.2% year to date.

IBUY holds a global basket of retailers that derive at least 70% of their sales online. U.S. stocks make up about 85% of the fund, while international stocks make up the rest. Stocks are equal weighted in the portfolio.

Current top holdings include Stamps.com, Overstock.com, Carvana, Shutterfly and IAC/InterActive.

The ProShares Long Online/Short Stores ETF (CLIX) is next on the list of online-focused ETFs. It’s a $51 million fund that’s risen 21.5% year to date. CLIX goes above and beyond the strategy of simply buying shares of online retailers. It does that, but simultaneously overlays a 50% short position on shares of traditional brick-and-mortar retailers.

The current portfolio includes long positions on Amazon, Alibaba, Chewy, Groupon, Grubhub, eBay and Wayfair. It’s also short Office Depot, L Brands, Signet Jewelers and Sally Beauty Holdings, among others.

Finally, the ProShares Online Retail ETF (ONLN) is one of the newest entrants in the online retail ETF space. Since launching in July 2018, the fund has gathered $23 million in assets.

ONLN is a global, market-cap-weighted fund, with familiar top holdings like Amazon, Alibaba, Shutterfly, eBay and Chewy. The ETF is up 12.2% year to date.

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2