ETFs to Avoid If Wal-Mart’s Fortunes Turn

February 15th at 2:00pm by Tom Lydon

For years, Wal-Mart (NYSE: WMT) could seemingly do no wrong. Now it’s been hit with downgrade number three. Some exchange traded funds (ETFs) are pretty heavy in the retailer, so you’ll want to be on the alert.

JPMorgan recently downgraded Wal-Mart from neutral to overweight, and Deutsche Bank and UBS also forecast a decline in the stock. It’s quite a turnaround for a retailer that shoppers flocked to at the height of the recession. It was one of the few that consistently notched solid results quarter after quarter, even amid tighter consumer spending. A few of the reasons for the darker outlook now:

  • Wal-Mart’s stock has barely moved in the last year, up just 2%
  • Fourth-quarter results were less than thrilling
  • Continued weak consumer spending in general as joblessness hovers at 9%
  • More competition in the bargain-hunting space as consumers increasingly seek out dollar stores and drug stores for their staples, says Bloomberg
  • More competition in the grocery space as stores like Target (NYSE: TGT) open markets within their stores

Wal-Mart is heavily dependent on U.S. sales – it accounts for 80% of its business, says Minyanville. It might be time for the retailer to take the lead from other corporations and look for growth overseas. [The Case tor Consumer Staples ETFs.]

Meanwhile, if the analysts are correct, you may want to look out for ETFs that are especially heavy in the retailer:

  • Retail HOLDRs (NYSEArca: RTH) has the largest weighting of Wal-Mart, which accounts for  whopping 18.7% of the fund. There are some key differences between HOLDRs and ETFs.
  • SPDR Consumer Staples Select Sector (NYSEArca: XLP) has the second-largest weighting with 9.2% in Wal-Mart. It’s the second-largest stock in the fund, just behind Procter & Gamble’s (NYSE: PG) 15.2% weighting.
  • Vanguard Consumer Staples  (NYSEArca: VDC) allocates 7.7% to Wal-Mart, behind Procter & Gamble and Coco-Cola (NYSE: KO).
  • iShares Dow Jones U.S. Consumer Index Fund (NYSEArca: IYC) counts Wal-Mart as its top holding, with 6.7% of the fund.

If you want exposure to retail spending without the hefty Wal-Mart allocation, SPDR S&P Retail (NYSEArca: XRT) allocates just 1.6% Wal-Mart and has a fairly even distribution between all other holdings with none weighted greater than 2%.

PowerShares Dynamic Retail (NYSEArca: PMR) may be even better: it owns no Wal-Mart and owns Dollar Tree (NYSE: DLTR) and Family Dollar (NYSE: FDO).

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.