Retail ETF 'XRT' Could Be on Red Tag Sale Status

With the first quarter of 2019 behind us, it’s easy to forget the retail sector since the holidays are a distant memory, but last month’s rally in the sector is a reminder to investors that they should consider adding retail-focused ETFs to their portfolios. While strength in the retail sector piggybacks off of strong consumer spending, there has been a lot of movement within the sector that could make for some interesting ETF plays like SPDR S&P Retail ETF (NYSEArca: XRT).

The U.S.-China trade wars have hit retail ETFs as of late, however, with XRT falling 7 percent in May. Last month, XRT was one of the most-shorted ETFs and its recent downturn is no doubt attracting more bears to the fund.

“Big box retailers are getting unloved in a big way and we’re going to continue to see more of this, especially if this market gets higher, the question is ‘Can these companies continue to bring profitability?’” said ETF Trends CEO Tom Lydon.

For investors looking to get into XRT on the cheap, now might be an opportune time to do so as the tariff-for-tariff battle between China and the U.S. are putting many of the fund’s holdings in a bind. With their revenues affected by the higher tariffs, bearish plays could also be abound, but for the more optimistic, buying on the dip is also an alternative.

XRT seeks to provide investment results that correspond generally to the total return performance of an index derived from the retail segment of a U.S. total market composite index. The index represents the retail segment of the S&P Total Market Index.

Thus far, the fund is up 11.78 percent year-to-date, which lags behind the S&P 500’s 13 percent. It’s still a stark contrast compared to the loss of 8 percent it experienced in 2018.

Key features of the fund:

  • Seeks to provide exposure the retail segment of the S&P TMI, which comprises the following sub-industries: Apparel Retail, Automotive Retail, Computer & Electronic Retail, Department Stores, Drug Retail, Food Retailers, General Merchandise Stores, Hypermarkets & Super Centers, Internet & Direct Marketing Retail, and Specialty Stores
  • Seeks to track a modified equal weighted index which provides the potential for unconcentrated industry exposure across large, mid and small cap stocks
  • Allows investors to take strategic or tactical positions at a more targeted level than traditional sector based investing

The retail space will certainly present a challenge for brick-and-mortar companies as Amazon leads the “bricks to clicks” movement towards the online retail marketplace. Last month, ETFs with the heaviest weighting of Amazon moved higher after the online retail giant topped earnings expectations.

Amazon’s earnings results:

  • EPS: $7.09 versus $4.72, according to analysts surveyed by Refinitiv
  • Revenue: $59.7 billion versus $59.7 billion, according to Refinitiv
  • AWS: $7.7 billion versus $7.7 billion, according to analysts surveyed by FactSet

Aside from XRT, investors can also consider the following ETFs:

  1. Fidelity MSCI Consumer Discretionary Index ETF (FDIS): seeks to provide investment returns that correspond generally to the performance of the MSCI USA IMI Consumer Discretionary Index. The index represents the performance of the consumer discretionary sector in the U.S. equity market.
  2. Consumer Discret Sel Sect SPDR ETF (NYSEArca: XLY): seeks investment results that correspond to the price and yield performance of publicly traded equity securities of companies in the Consumer Discretionary Select Sector Index. The index includes securities of companies from the following industries: retail; hotels, restaurants and leisure; textiles, apparel and luxury goods; household durables; automobiles; auto components; distributors; leisure products; and diversified consumer services.
  3. ProShares Online Retail ETF (NYSEArca: ONLN): seeks investment results, before fees and expenses, that track the performance of the ProShares Online Retail Index. The index tracks retailers that principally sell online or through other non-store channels. The index uses a modified market-capitalization weighted approach, is rebalanced monthly and is reconstituted annually. Retailers may include U.S. and non-U.S. companies. To be eligible, retailers must: be classified as an online retailer, an e-commerce retailer, or an internet or direct marketing retailer, according to standard industry classification systems; have a market capitalization of at least $500 million; have a six-month daily average value traded of at least $1 million; and meet other requirements.

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