As the retail sector has rebounded, retail ETFs have become pricey.
With a chill in the air, snow on the ground in some parts of the United States, and holiday music playing at every turn, retailers right now have to be wondering if this holiday season's sales numbers will be music--to their ears.
So far, retail numbers have looked rosy. For the past year, consumers have done a great job of deleveraging their personal balance sheets, which has meant that they have had more money in their wallets, and consumer sentiment has been steadily rising. Recent earnings reports from Wal-Mart
When all the smoke clears, the retail sector as a whole is expected to see growth of 3.5% to 4% for the full-year 2010, with luxury retail expected to be up even more (in the 6% range). Clearly, shoppers are in a buying mood, although thus far, there have been pockets where retail has been a little weaker--furniture, electronics and appliances, and department stores.
Investors looking for an exchange-traded fund to invest in the retail sector have a few options. There are just three retail-only ETFs, one of which is very thinly traded.
Here, we take a closer look at the retail ETFs, along with our take for investors about the attractiveness of each one.
SPDR S&P Retail
This is the 800-pound gorilla of retail ETFs. As one of the 25 most-liquid ETFs of any kind, XRT is a true bellwether for retail investors, with exposure to more than 60 diverse bricks-and-mortar retailers, the overwhelming majority of which are discretionary in nature. In addition, because the index that it tracks is equally weighted, even really large, big-box retailers like Wal-Mart and Target are precluded from making up a large amount of the ETF. In addition, with an annual fee of 0.35%, XRT is a relatively inexpensive way to play the space.
The SPDR has its drawbacks. Its equal-weighted nature means that it holds mostly smaller-cap companies (81% of the fund's assets are invested in small- and mid-cap firms) and, as such, is far more volatile. It does not own home-improvement retailers like Home Depot and Lowe's
One final note: XRT has the most shares sold short of any ETF, with its percentage recently climbing during the month of November to some shockingly high levels (more than 300% short). Clearly, heavy market sentiment believes that XRT and other retail ETFs are poised for a stumble, making a new investment at XRT at this time a clear contrarian play. Similarly, XRT (or any other overvalued retail ETF) clearly is an option for investors interested in shorting the retail sector as a whole.