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Under The Hood: Another Retail ETF

11/28/2012

This certainly is the time of year to talk about consumer discretionary and retail ETFs. The U.S. consumer, the driving force behind 70 percent of this country’s GDP, appears poised to flex his (and her) muscles this holiday shopping season.

While this is the “most wonderful time of the year” and a critical one at that for retail ETFs, it is easy for some¬†retail ETFs to slip through the cracks as the conversation regarding these funds is usually dominated by the SPDR S&P Retail ETF (XRT). By virtue of an impressive year-to-date performance, the Market Vectors Retail ETF (RTH) has crept into the conversation as well, but there are more than just two retail ETFs worth considering.

One of those ETFs is the semi-obscure PowerShares Retail Portfolio (PMR). The PowerShares Retail Portfolio has been around for over seven years and has about $50 million in assets under management. Combine that AUM total with average daily volume less than 23,000 shares and ETF AUM/volume critics, of which there are plenty, practically have built-in excuses to gloss over PMR.

PMR’s lineup is best described as a potpourri of retail names. The fund features exposure to stocks ranging from Wal-Mart (WMT) to Whole Foods (WFM) to Costco (COST) to Gap (GPS).

What separates PMR from a fund such as RTH is small-cap exposure. Approximately 42 percent of PMR’s weight is devoted to small caps, both growth and value names. And speaking of allocations, PMR is validated as a holiday shopping play because nearly two-thirds of its weight is devoted to discretionary stocks. Over 28 percent of the fund’s weight goes to staples names with a small allocation being devoted to industrials.

Overall, nearly 61 percent of PMR’s weight is allocated to growth stocks. That translates to a somewhat elevated valuation. PMR has a price-to-earnings ratio of 16.4 and a price-to-book ratio of nearly 2.8,¬†according to PowerShares data. That compares to a P/E/ of 15.35 and a price-to-book ratio of 2.45 for XRT. In its favor, PMR’s constituents have an average return on equity of almost 24 percent.

Based on pure performance, PMR is running third to RTH and XRT on a year-to-date basis, but that does not mean the fund is not worthy of consideration. PMR’s weight, though not excessive, to small-caps indicates the fund has utility in a risk-on environment. Should the market experience a legitimate January Effect in early 2013, the scenario under which small-caps lead an early year market rally, PMR has the potential to outperform other retail ETFs.

To that end, PMR’s market capitalization and sector weightings do imply some added beta, but that also means the spoils of owning this fund can be rich in a cooperative market setting. Consider paring PMR with the more conservative RTH to cover all retail bases. Should the recent ebullience seen on Black Friday carry over throughout the holiday shopping season, investors will be able to start the new year out on the right note by taking gains in both ETFs.

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