As consumers pare back spending, some retail stores are thriving as spending habits change. Across the discount retail sector, consumers are maintaining needs-based purchases while delaying larger discretionary spending until necessary. The Federal Reserve’s March 5 Beige Book report noted that while consumer spending remains “very weak on balance,” discount retailers are a bright spot as spenders shift resources to necessities. This shift in spending could also be profitable for ETFs such as the PowerShares Dynamic Retail Portfolio (PMR), 
which includes discount retailers among its top holdings. While much of the market is seeing red, PMR boasts a positive market return for the three months ending March 13, outperforming the S&P 500 by nearly 14%.
PMR tracks the Retail Intellidex, which includes retail companies determined to have the highest potential for capital appreciation. PMR’s components are principally engaged in operating department stores, discount stores, warehouse clubs, superstores and specialty stores. The 30 stocks in the underlying index are drawn from the 2,000 largest stocks traded on the major U.S. stock exchanges and then ranked based on factors such as fundamental growth, stock valuation, investment timeliness and risk factors. PMR’s methodology and performance have helped the fund gain momentum recently in our Sector Momentum Tracker rankings, moving from the No. 20 position on January 13 to the No. 13 spot March 10.
TJX Companies (TJX), PMR’s largest component, remained optimistic despite a decrease in sales when it revealed its February sales number on March 5. Sales for the four-week period ended February 28, 2009, slumped 2% versus the $1.25 billion achieved during the four-week period ended March 1, 2008. The sales numbers reflected the anticipated negative impact of foreign currency exchange rates, while consolidated comparable-store sales remained flat year over year. TJX owns 874 T.J. Maxx, 806 Marshalls, 318 HomeGoods and 135 A.J. Wright stores in the United States. In Canada, the company operates 200 Winners, 75 HomeSense and 2 STYLESENSE stores, and in Europe, it operates 234 TK Maxx and 7 HomeSense stores, making it the largest off-price retailer in the U.S. and worldwide. Despite declining sales, President Carol Meyrowitz recently noted that “despite the tough economic environment, we are pleased with February consolidated comparable-store sales. Customer traffic continues to tell us that our excellent values are attracting customers despite the challenging times.”
PMR’s fourth-largest component, Amazon.com Inc. (AMZN), recently announced that it would be at the forefront of the new “cloud computing” trend. Cloud computing, which offers a faster, easier way to provision computing resources, is at the heart of AMZN’s own IT infrastructure. AMZN promises to extend its own model to others as a “pay-as-you-use” fee structure in return for a multiyear service plan. Offering massively scalable IT services at a discount will allow other companies the storage and capabilities of giants like Amazon. By staying at the forefront of this technology, AMZN is helping to position shareholders for success as the Internet becomes an increasingly integral part of business infrastructure. Amazon’s price has doubled in four months, prompting some skepticism from traders, while others cite earnings growth as a legitimate reason for the upswing.
Low interest rates have made the yields of high dividend stocks, such as PMR component Wal-Mart (WMT), even more attractive to enterprising investors. While the economic turmoil has forced some companies to cut dividends in recent months, WMT is among the cache of companies increasing dividends in 2009. WMT’s sales jumped from $29.2 billion to $30 billion year over year during February. Despite the negative impact of foreign exchange rates, the high-end retail crunch has sent more consumers into Wal-Mart aisles. The general trend of forsaking luxury retailers for discount stores bodes well for WMT and other discount retailers in PMR’s portfolio.
While the retailers that constitute PMR are household names, PMR itself lacks the liquidity of its top components. The three-month average daily trading volume for PMR is fewer than 100,000 shares per day, and while the ETF will likely avoid a shutdown, as suffered by less liquid peers, investors should remain mindful when investing. While the trading volume of PMR is on the low side, so is the security-specific risk of the fund. PMR’s top component makes up only 5.24% of the fund, so while it is helpful to examine individual components when researching this ETF, a broader outlook of the sector should also be helpful.
