Retail exchange traded funds (ETFs) could be hurting for the holidays, and gift cards might be the victim.

As more retailers go bankrupt, many consumers could be left holding the bag in the form of unspent gift cards.

Jerry Hirsche for The LA Times reports that out on Main Street, some are realizing that a gift card from a troubled retailer is like a bank account without FDIC insurance. Last season, shoppers spent an average of $26.3 billion on gift cards from retailers, up from $24.8 billion in 2006 and $18.5 billion in 2005.

Big retailers such as Bombay Co. and Sharper Image filed for bankruptcy protection, leaving gift card holders with millions of dollars of what the Bankruptcy Court considers unsecured debt. Both chains have since closed.

But in this new “use it or lose it” climate, one wonders if consumers are more likely to plunk down cash for a gift instead. And that could hurt retailers, as many of them enjoy the post-holiday bounce from gift card sales. In a recent survey, 53% of consumers who redeemed cards said they always spend more than the face value.

Gift card holders could lose more than $75 million just from store and restaurant closings in 2008 and the numbers are expected to grow. In liquidations, the customer is out of luck in all cases. State laws have proved ineffective in protecting gift card holders during bankruptcies in California.

So, why not avoid this and dodge the gift card? There is always cash, which is never turned down, or online shopping, so you don’t even have to leave home. If you have a gift card and you’re worried about the health of the retailer, go out and spend it before it’s too late!

  • Retail HOLDRs (RTH), down 22.9% year-to-date

Retail Exchange Traded Funds (ETFs)

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.