Retail stocks and exchange traded funds have recently shown signs of life, but the group has lagged the broader market in 2014.
Over the past month, the SPDR S&P Retail ETF (NYSEArca: XRT) and the Market Vectors Retail ETF (NYSEArca: RTH) are both up more than 3%, but year to date the two ETFs are off an average of almost 2%. Investors looking to combat weakness in the consumer discretionary and retail sectors can turn to ETFs that emphasize the quality factor and low volatility, including the PowerShares S&P 500 High Quality Portfolio (NYSEArca: SPHQ) and the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV).
As factor-driven strategies have gained momentum in the ETF space, ample attention has been paid to the quality factor, defining it and what it aims to deliver. Importantly, the quality factor has proven durable during periods of lethargic consumer demand.
“The quality factor has historically been able to outperform the S&P 500 Index during periods of weak consumer demand,” said PowerShares Senior Equity Product Strategist Nick Kalivas in a research note.
Kalivas notes that when retail sales slowed from mid-2006 through 2008, SPHQ outperformed the S&P 500. SPHQ tracks the S&P 500 High Quality Rankings Index, which “is designed to provide exposure to the constituents of the S&P 500 Index that are identified as stocks reflecting long-term growth and stability of a company’s earnings and dividends,” according to PowerShares.
The fund is one of the more seasoned factor-driven ETFs on the market, having debuted in late 2005. Although consumer discretionary names account for 19.1% of SPHQ’s weight, making the group the fund’s third-largest sector allocation, the ETF has proven sturdy in the face of weak consumer demand. SPHQ has slightly outpaced the S&P 500 this year and hit a new all-time high Friday. [Time for a High Quality ETF]
In a sign of the rising allure of quality-based strategies, SPHQ has pulled in $38.2 of its $380.5 million in assets under management just this year, according to PowerShares data.
A low volatility approach, such as the one offered by SPLV, can also help portfolios endure weak consumer trends, said Kalivas.
“Out of 100 current holdings as of May 27, 2014, the fund has only a few retailers as defined by the Global Industry Classification Standard. Home Depot (0.95%) is the only classification in retailing; Costco (1.00%), Wal-Mart (1.20%) and CVS Caremark (0.94%) are in food and staples retailing; and McDonald’s (1.23%) is in consumer services. These five names total 5.32% of the fund,” added Kalivas.