5 ETFs to Play the New Retail Climate
February 25th at 11:00am by Tom Lydon
This retail landscape is not your parents’ retail landscape. Gone are the days of fierce brand loyalty and believing that higher cost means higher quality. Today’s shopper is happily snapping up store brands and always bargain-hunting. This shift means looking at your retail exchange traded funds (ETFs) a little differently.
Three trends in particular are revealing themselves to be forces in the world of retail:
Tepid Spending. Target Corp. (NYSE: TGT), Home Depot Inc. (NYSE: HD) and Macy’s Inc. (NYSE: M) joined other consumer-focused companies in warning that sales gains will continue to slow in the first half of the year, report Miguel Bustillo, Sara Murray and Rachel Dodes for The Wall Street Journal.
Business purchases and other indicators say the economy is improving, but unemployment is still at 9.7%. The Consumer Confidence Index fell to 46.0 in February from 56.5 in January, a 10-month low. Booz & Co. conducted a survey that revealed that only 18% of consumers plan on purchasing clothing and shoes at pre-recession levels in the next year and two-thirds say they are willing to go to other stores for lower prices. [Indicators and Job Reports.]
Retailers are changing their strategy from aggressive expansion to managing conservatively and tightening costs and inventory levels to minimize risk. [Retail ETFs Benefit from Smarter Retailers.]
Out With Brand Names. Large retail stores like Wal-Mart (NYSE: WMT) are seeing shoppers buying less and looking for bargains, and the stores are left with too many types of brand-name products, writes Parija Kavilanz for CNNMoney. Bill Pecoriello, CEO of market research firm ConsumerEdge Research, believes Wal-Mart and other retailers will simplify shelves by taking out several name-brands across categories like household products, toiletries and food staples. What does that mean for name-brand stalwarts like Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG). To stay competitive, they may have to slash prices or risk becoming obsolete.
Retailers are also threatening to take products of the shelves in an attempt to look for better deals from suppliers on both prices and advertising.
Taking It Online. Internet researcher comScore Inc. (NASDAQ: SCOR) found that total retail e-commerce spending increased by 3% to $39.5 billion in the fourth quarter, but sales for the year decreased $129.8 billion, reports John Kell for The Wall Street Journal. ComScore Chairman Gian Fulgoni believes online retail spending will continue to increase, but warns that high unemployment and consumer shift toward savings will hinder the industry.
Online shopping has major appeal. Not only is there no need to find a parking space or fend off pushy salespeople, but often looking around online can help you discover bargains that can’t be found in brick-and-mortar shops. Add in a free shipping deal, and shopping by computer becomes nearly irresistible.
It’s not all doom and gloom for retailers – there have been signs of a turnaround. According to the National Retail Federation, retail industry sales for January (excluding autos, gas stations and restaurants) increased 2% year-over-year and 0.1% seasonally adjusted from December. The U.S. Commerce Department reported that total retail sales in January rose 0.3% seasonally adjusted from December and 4.6% year-over-year. Economists expect to see continued improvements this year. [Consumers, Manufacturing and Incomes.]
ETFs have done a good job of reflecting these climate changes, but be sure to look under the hood. Aside from watching the 200-day moving average for opportunities, check for funds that hold names that could benefit from these trends. [Can Luxury ETFs Withstand Bargain-Hunters?]
For more information on retail, visit our retail category.
- SPDR S&P Retail (NYSEArca: XRT): Top holdings include CarMax (NYSE: KMX), Dress Barn (NASDAQ: DBRN) and Jo-Ann Fabric Stores (NYSE: JAS)
- PowerShares Dynamic Retail (NYSEArca: PMR): Bargain companies and stores with their own brands like Bed Bath & Beyond (NASDAQ: BBBY), Dollar Thrifty Automotive Group (NYSE: DTG), Hertz (NYSE: HTZ) and Target make up this fund.
- Retail HOLDRs (AMEX: RTH). Companies with a heavy online presence, such as Best Buy (NYSE: BBY), Amazon (NASDAQ: AMZN) and companies with their own store brands like Wal-Mart, Target and CVS (NYSE: CVS) make up this fund.
- Vanguard Consumer Staples ETF (NYSEArca: VDC). Lots of names anyone would know: General Mills (NYSE: GIS), Heinz (NYSE: HNZ), Pepsi (NYSE: PBG) and Yum! Brands (NYSE: YUM). Many people may have gone generic, but there’s still a large population out there that swears by brand names.
- PowerShares Dynamic Leisure & Entertainment (NYSEArca: PEJ). McDonald’s (NYSE: MCD), Yum! Brands (NYSE: YUM), Expedia (NASDAQ: EXPE), Bob Evans Farms (NASDAQ: BOBE). People aren’t eating out as much as they used to, but when they do, they’re usually thinking “cheap,” not “five-star dining.”
Max Chen contributed to this article.
