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.
U.S. stocks have been hitting a series of all-time highs, but that has not derailed SPLV from participating in that upside. Like SPHQ, SPLV has outperformed the S&P year-to-date and hit a fresh all-time high Friday. [Low Volatility ETFs for Defense]
Critics assert that SPLV is a utilities ETF in disguise, but the assertion misses the mark. Remember that the ETF’s holdings are culled from the 100 S&P 500 stocks with the lowest trailing 12-month volatility. So if utilities volatility spiked and/or volatility dramatically declined in another sector, SPLV’s utilities exposure would be drop.
The utilities sector is the best performer in the S&P 500 this year, which has benefited SPLV with its 23.7% weight to the group. However, the rotation to value stocks, including industrials, has also helped SPLV. The ETF devotes 16.7% of its weight to industrial names. [Low Vol ETFs Back in Style]
“In the face of a slowdown in refinance activity and potentially soft retail activity well into 2015, quality and low volatility may be strategies to consider for your portfolio,” said Kalivas.
PowerShares S&P 500 High Quality Portfolio
