Should You Buy Retail ETFs For Q4?

by: Zacks Funds

Retailing involves buying large quantities of goods and selling them in smaller quantities to consumers for a profit. The health of the retail industry is an important economic indicator as it is linked directly to consumers and their propensity to spend. Consumer spending is the key to the well being of any economy as it accounts for more than two-thirds of economic activity.

The link between consumer spending and the retail industry becomes more relevant as retail sales attract approximately 30% of total consumer spending in the U.S. Also, the retail industry ranks among the top U.S. industries and employs an enormous workforce, contributing to the health of the job market.

Before jumping on to the trends in retail, here's a peek into the key economic indicators, which suggest where the market is heading.

Recent data reveal that U.S. consumer spending rose for the fourth straight month in July, climbing 0.3% after a 0.5% rise in June, 0.3% in May and 1.1% in April. This indicates that the U.S. economy is poised to pick up pace in the second half of 2016, propelled by growth in domestic consumption. The report further suggests continued confidence on the part of consumers backed by a steady job market as well as low interest rates and gasoline prices. Also, the report reflects a 0.4% gain in income, higher than the figures posted in the last two months.

Also, a report by the Commerce Department suggests that the second estimate for real gross domestic product (GDP) expanded at an annual rate of 1.1% in the second quarter of 2016, compared to the first quarter increase in real GDP of 0.8%. The second estimate stands almost at par with the advance estimate of 1.2%, keeping the picture of economic growth intact.

We note that the U.S. labor market looks quite stable, with unemployment rate for August remaining steady for the third straight month at 4.9%. The report by the Bureau of Labor Statistics indicates that a total of 151,000 nonfarm payroll was added in August.

While the rebounding U.S. economy is making retailers optimistic, retail sales, recorded by the nation's largest retail trade group - National Retail Federation (NRF) - fell 0.3% in August, following a strong June and a relatively flat July. However, the sales decline in the month was wider than market expectations of a 0.1% fall. Nevertheless, analysts believe that this is a temporary dip and consumers will continue to drive growth in the U.S. economy.

Additionally, NRF had projected retail sales for 2016 to rise 3.1%, which is higher than the 10-year average sales growth of 2.7%. Online sales in 2016 are expected to increase in the band of 6-9%.

Market experts expect retail sales growth in 2016 to come on the back of improving wages, job creations as well as steady consumer confidence, which will negate the headwinds from an uncertain global environment.

Playing the Sector through ETFs

ETFs present a low cost and convenient way to get a diversified exposure to this sector. Below we have highlighted a few ETFs tracking the industry:


Launched in June 2006, SPDR S&P Retail is an ETF that seeks investment results corresponding to the S&P Retail Select Industry Index. This fund consists of 96 stocks, with the top holdings Wayfair Inc. (NYSE:W), Lithia Motors Inc. (NYSE:LAD) and Tiffany & Co. (NYSE:TIF) representing asset allocation of 1.33%, 1.33% and 1.28%, respectively, as of September 27, 2016. The fund's gross expense ratio is 0.35%, while its dividend yield is 1.37%. XRT has $621.7 million of assets under management (AUM) as of September 26, 2016.

Market Vectors Retail ETF (NYSEARCA:RTH):

Initiated in December 2011, Market Vectors Retail ETF tracks the performance of Market Vectors US Listed Retail 25 Index. The fund comprises 26 stocks of which the top holdings, Inc. (NASDAQ:AMZN), Home Depot, Inc. (NYSE:HD) and Wal-Mart Stores, Inc. (NYSE:WMT) represent asset allocation of 17.10%, 7.18% and 6.44%, respectively, as of September 26, 2016. The fund's net expense ratio is 0.35% and dividend yield is 2.24%. RTH has managed to attract $122.7 million in AUM till September 26, 2016.

PowerShares Dynamic Retail (NYSEARCA:PMR):

PowerShares Dynamic Retail, launched in October 2005, follows the Dynamic Retail Intellidex Index and is made up of 30 stocks that are primarily engaged in operating general merchandise stores such as department stores, discount stores, warehouse clubs and superstores. The fund's top holdings Wal-Mart Stores Inc. (WMT), Walgreens Boots Alliance, Inc. (NASDAQ:WBA) and Ross Stores Inc. (NASDAQ:ROST) account for 5.25%, 5.21% and 5.18% of assets, respectively, as of September 27, 2016. The fund's net expense ratio is 0.63%, while its dividend yield is 0.83%. PMR has managed to attract $23 million in AUM as of Sep 26, 2016.

Amplify Online Retail ETF (NASDAQ:IBUY):

Launched in April 2016, Amplify Online Retail ETF helps investors gain access to a basket of companies which generate significant revenues from online and virtual retail sales. IBUY follows the EQM Online Retail Index. This fund consists of 39 stocks, with the top holdings iShares Core High Dividend (NYSEARCA:HDV), Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) and Vanguard High Dividend Yield ETF (NYSEARCA:VYM) representing asset allocation of 9.98%, 9.58% and 9.35%, respectively, as of September 27, 2016. The fund's gross expense ratio is 0.65% and has AUM of $2.8 million as of September 26, 2016.

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