XRT SPDR S&P Retail

The U.S. economy is showing improvement on the back of solid labor and housing data. Though retail sales were mixed in July, an improvement is clear for four consecutive months, indicating acceleration in consumer spending (read: The Comprehensive Guide to Retail ETFs).

Retail Sales Data

Retail sales rose 0.2% in July but fell short of market expectations of 0.3% growth. However, retails sales excluding auto, gas and building materials rose 0.5% in July, representing the biggest gain in seven months. Sales at U.S. department stores also increased 0.6%, the highest since March 2012.

The retail data is not only an important piece of information for retailers, but also for the broader markets. This is because it helps to gauge the value of retail purchases made and gives an idea about the consumption growth pattern in the economy, which in turn plays a vital role in the growth of the economy.

Investors should note that consumer spending accounts for more than two-thirds of demand in the U.S. economy, so any news from this important space is sure to drive markets (read: 3 Top Ranked Consumer ETFs to Buy Now).

July data suggests that the economy is regaining momentum after tax hikes and federal budget cuts drag economic growth in the first half of 2013. Moreover, this could increase chances of QE3 tapering in September.

Last month, Fed Chairman Ben Bernanke signaled that monthly bond purchases (QE3) might be curbed to lower borrowing costs and boost employment, by the end of 2013, if the economy continues to improve.

Quick Look to Q2 Earnings

The retail sector has done reasonably well so far this earnings season, with roughly half of the companies reporting to date. Total earnings for the 54% of retail companies that have already reported are up +11.6% on +4.9% higher revenues. This seems better, particularly on the revenue front, compared to the same group of companies in Q1 (read: Time to Buy Top Ranked Retail ETFs?).

Results from some major retailers are yet to come by the end of this week and in the next. Wal-Mart (WMT), NORDSTROM (JWN) and Kohl’s (KSS) are expected to release their earnings results on Aug 15 while others like Urban Outfitters (URBN), J. C. Penney (JCP), Best Buy (BBY) and Home Depot (HD) are scheduled to release on Aug 19.

ETFs to Watch

Investors seeking to make a targeted bet on the sector currently have three choices – SPDR S&P Retail ETF (XRT), Market Vectors Retail ETF (RTH) and PowerShares Dynamic Retail Portfolio (PMR). All three delivered strong returns of 31.9%, 26.12% and 30.36%, respectively, in the year-to-date period.

XRT is the most popular ETF in the retail space with AUM of over $1.1 billion and it tilts towards small cap securities. The fund follows the S&P Retail Select Industry Index and holds just less than 100 stocks in its portfolio.

The ETF is well spread across each security as none hold more than 1.36% of assets, thereby eliminating company specific risk. The ETF charges 35 bps a year in fees and has a Zacks Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook (see more in the Zacks ETF Center).

Meanwhile, the Market Vectors Retail ETF provides exposure to the 26 largest firms by tracking the Market Vectors US Listed Retail 25 Index. In particular, the top three holdings are WMT, HD and Amazon.com (AMZN) and these combine to take up more than 24% of assets.

The product has amassed $42.5 million in its asset base so far in the year and charges 35 bps in annual fees. RTH currently has a Zacks Rank of 3 or ‘Hold’ rating with a ‘Low’ risk outlook.

Coming to the PowerShares product, PMR tracks the Dynamic Retail Intellidex Index. This benchmark uses various investment criteria like price momentum, earnings momentum, quality, management action, and value to include stocks in the list.

With holdings of 30 stocks, the fund is somewhat concentrated on its top 10 holdings. Kroger (KR), Gap (GPS) and Whole Foods Market (WFM) occupy the top three spots in the basket with a combined 15.41% share.

The ETF has managed assets worth $39.4 million and charges 63 bps in fees and expenses. The product has a Zacks Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook (read: 3 Hot Sector ETFs Surging to #1 Ranks).

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PWRSH-DYN RETL (PMR): ETF Research Reports
 
MKT VEC-RETAIL (RTH): ETF Research Reports
 
SPDR-SP RET ETF (XRT): ETF Research Reports
 
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