With the SPDR S&P Retail ETF (NYSEArca: XRT), the largest retail-related exchange traded fund, already down 10% year-to-date, it is not surprising that some retail analysts are advising a cautious approach to the downtrodden sector.
XRT’s rival, the VanEck Vectors Retail ETF (NYSEArca: RTH), is up 5.7% year-to-date, a gain owed in large part to that ETF’s significant allocation to high-flying Amazon.com Inc. (NASDAQ: AMZN).
Adding to the concern for an ETF such as XRT is the fact that the broader consumer discretionary sector, which includes retail, is in the middle of its seasonally strong period. In fact, there are another six or seven weeks remaining in the strongest period of the year for the discretionary sector, but XRT is languishing.
Oppenheimer analysts “write that the backdrop for hardline retailers is likely to continue to be challenging, given spotty spending, high valuations, and overly optimistic Street estimates,” reports Teresa Rivas for Barron’s. “They note that in May and June, real personal consumption expenditures were up anemic amounts. And of course there is the omnipresent threat from Amazon.”
Making matters worse are the struggles of some big-name brick-and-mortar retailers, including Sears Holding (NASDAQ: SHLD), which some retail sector observers fear is on the brink of collapse. A similar sentiment has recently been applied to J.C. Penney (NYSE: JCP). Shares of J.C. Penney appear to be locked in a death spiral with the stock down almost 28% over the past week, bringing its year-to-date loss to over 53%.
“That’s not to say it’s all doom and gloom. The second quarter brings better weather, distance from delayed tax returns and in some cases more subdued underlying stock expectations,” reports Barron’s.
Investors have added $102.7 million in new assets to XRT this year while pulling almost $27 million from RTH. XRT is also one of the most heavily shorted ETFs.
Related: Interesting Activity in Retail ETF Ahead of Earnings
The trend away from traditional department stores and apparel retailers to online shopping destinations should benefit the Amplify Online Retail ETF (NasdaqGM: IBUY), which debuted last year. IBUY, which is comprised of global companies that generate at least 70% of revenue from online or virtual sales, has been one of the best-performing retail ETFs since its inception.
IBUY provides exposure to many familiar online names, such as WayFair Inc (NYSE: W), Etsy (NasdaqGS: ETSY), FTD Companies (NasdaqGS: FTD), Overstock Com Inc (NasdaqGS: OSTK) and Priceline (NasdaqGS: PCLN).
For more information on the consumer sector, visit our consumer discretionary category.