We are now in November and many are preparing for the “Black Friday” pre-holiday rush at retail stores. On that note, a retail exchange traded fund, SPDR S&P Retail (NYSEArca: XRT), has been very active lately with a great deal of selling pressure in the marketplace in the ETF.
After trading at multi-month highs late last week, the ETF has given back some ground in the past three sessions and nearly $200 million has flowed out of the fund (equivalent to about 25% of the assets under management in the fund).
Conversely, we do point out call buying in this ETF just yesterday, so apparently there are other investors on the other side of this trade. XRT is structured as an equal weighted index.
The individual weightings of each of the positions in the ETF is approximately 1.2%, so the equal weighting clearly dampens any potential top heaviness that may be present in other products that have different index methodologies.
For instance, Retail HOLDRS (AMEX: RTH) is structured as an unmanaged trust, and the fund is highly concentrated in a handful of positions, with Wal-Mart (NYSE: WMT), Amazon (NasdaqGS: AMZN), Home Depot (NYSE: HD), Target (NYSE: TGT) and Costco (NasdaqGS: COST) making up 60% of the entire portfolio.
Thus, single stock risk is much more pronounced in RTH than in XRT. Another alternative in the retail space is PowerShares Dynamic Retail (NYSEArca: PMR), which follows an alpha-based quantitative approach that screens equities in the sector for fundamental growth, valuation, investment timeliness, and risk measures in determining the composition of the portfolio and the weightings of the holdings.
For those investors who see the XRT redemptions that we mentioned above as a sign of more potential weakness in the sector in the near term, perhaps Direxion Daily Retail Bear 2X (NYSEArca: RETS) presents a leveraged trading opportunity from the short side.