Retail ETFs Tumble On Macy's Profit Warning

Includes: M, PMR, RTH, XRT
by: Zacks Funds

With a digital transformation in shopping and consumers splurging online, retailers are struggling with feeble sales that are forcing them to shut shop or file for bankruptcy. This is weighing heavily on their share price performance.

The woes intensified after profit margin warnings from Macy's (NYSE:M) triggered a new wave of panic in the beleaguered sector. The departmental store chain warned that its gross margin will continue to shrink this year. It expects gross margin to be 60-80 bps points lower this year from last year and 100 bps lower for the ongoing quarter. The move came as the company is struggling to shift its inventory.

This has led to a sharp decline of more than 8% in Macy's share price, pushing it to the lowest level since February 2011. Additionally, this has taken a toll on the entire retail sector pushing down Kohl's (NYSE:KSS) by 5.8%, Foot Locker (NYSE:FL) by 4.4%, J.C. Penney (NYSE:JCP) by 4.1%, Dollar General (NYSE:DG) by 3.8% and Nordstrom (NYSE:JWN) by 3.6%.

ETF Impact

The terrible trading in stocks also sent the retail ETF space into red on the day. The SPDR S&P Retail ETF (NYSEARCA:XRT), VanEck Vectors Retail ETF (NYSEARCA:RTH) and PowerShares Dynamic Retail Portfolio (NYSE:PMR) lost 2.2%, 1.5% and 1.2%, respectively.

Below we profile these ETFs in details and discuss some of the specifics behind their recent slump:


This product tracks the S&P Retail Select Industry Index, holding 103 securities in its basket with each accounting for less than 2.2% of assets. Apparel retail takes the top spot at 20.3% share while Internet and direct marketing retail, specialty stores, and automotive retail round off the next three spots with a double-digit allocation each. The fund has amassed $332.3 million in its asset base and charges 35 bps in annual fees.


This fund provides exposure to the 26 largest retail firms by tracking the MVIS US Listed Retail 25 Index. It is highly concentrated on the top firm - Amazon (NASDAQ:AMZN) - at 17.1% while other firms hold less than 8.1% share. The ETF has a certain tilt toward specialty retail, which accounts for 27% share while Internet and direct marketing (24%), hypermarkets (11%), healthcare services (10%) and drug stores (9%) round off the top five. The product has amassed $69 million in its asset base and charges 35 bps in annual fees.


This fund follows the Dynamic Retail Intellidex Index. In total, the product holds 30 securities with each holding less than 5.3% of assets. In terms of industrial exposure, specialty retail takes the top spot at 32% while food retail (19%), drug stores (13%) and hypermarkets (13%) round off the top three positions. The fund has accumulated $14.3 million in its asset base and charges 63 bps in fees per year.

What Lies Ahead?

Despite the current slide, the outlook for the sector is quite promising. This is because consumers remain optimistic on the economy for the summer months even with slight fall in the May reading of the consumer confidence index, as measured by both University of Michigan and the Conference Board.

Additionally, retail sales rebounded to grow 0.4% in April after two months of sluggish sales, signaling a step-up in spending by Americans in the second quarter.

Though overall retail has an ugly Zacks Sector Rank in the bottom 19%, about 63% of the industries have a solid Zacks Industry Rank in the top 44%, reflecting strong growth prospects in the weeks ahead.

Moreover, the three products detailed above have a Medium risk outlook with a solid Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy) for RTH and XRT, respectively, and a Zacks ETF Rank of 3 (Hold) for PMR. As a result, risk-tolerant investors may want to consider the recent slump as a buying opportunity, should they have the patience for extreme volatility.

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