Retail ETFs To Watch Ahead Of Big-Box Earnings
The Q2 earnings season has reached the tail end for all sectors save retail which is yet to come up with less than half of its total reports. Total earnings for the sector reported so far are up 6.6%, in line with Q1 earnings growth and well above the four-quarter average of 5.0% improvement. Earnings surprises are modest at 69.6% with fewer retailers beating estimates relative to Q1 but above the four-quarter average.
Revenue growth of 11.9% is, no doubt, better than both the first quarter and the four-quarter averages. In fact, retail is the big contributor to revenue growth in Q2. Robust gains came from Amazon (AMZN - Analyst Report) and easy comparisons at Walgreens (WBA - Analyst Report). However, revenue beat of 43.5% is well below Q1 and the four-quarter average (read: 3 Sector ETFs to Watch on Revenue Growth Potential).
While results from departmental stores like Macy’s (M - Analyst Report) and Kohls (KSS - Analyst Report) disappointed investors, robust numbers from Nordstrom (JWN - Analyst Report) and J. C. Penney (JCP - Analyst Report) have injected fresh optimism into the whole retail sector. The strength will likely continue with big-box retailers’ due to announce earnings this week. Some of these include Wal-Mart (WMT - Analyst Report), Home Depot (HD - Analyst Report), Lowe’s (LOW - Analyst Report), Target (TGT), Staples (SPLS) and Gap Inc. (GPSGPS).
Solid Trends
Though the prospect of rising rates are weighing on consumers’ confidence, the combination of solid hiring, a stronger economy and cheaper fuel are encouraging consumers to spend more after a muted start to 2015. Notably, the economy expanded at an impressive rate of 2.3% in the second quarter following a meager 0.6% growth in the first quarter.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, climbed 2.9% in the second quarter following a 1.8% increase in the first quarter. Meanwhile, retail sales have been heading toward the growth path of 2.4% annually through July, though it has been choppy in recent months (read: ETFs to Watch on Rebounding Retail Sales in July).
ETFs in Focus
Given encouraging fundamentals and a spate of earnings releases this week, investors should carefully watch the movement in retail stocks and could consider a broad play via ETFs in order to take advantage of the power-packed earnings seen so far.
SPDR S&P Retail ETF ((XRT - ETF report))
This product tracks the S&P Retail Select Industry Index, holding 104 securities in its basket. It is widely spread across each component as none of these holds more than 1.35% of total assets. Small cap stocks dominate nearly three-fifths of the portfolio while the rest have been split between the other two market cap levels.
In terms of sector holdings, apparel retail takes the top spot at one-fourth share while specialty stores, Internet retail and automotive retail also have double-digit allocation each. XRT is the most popular and actively traded ETF in the retail space with AUM of about $1.1 billion and average daily volume of more than 1.9 million shares. It charges 35 bps in annual fees and is down 3.6% over the past one month. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.
Market Vectors Retail ETF ((RTH - ETF report))
This fund tracks the Market Vectors US Listed Retail 25 Index and holds about 26 stocks in its basket. It is a large cap centric fund and is heavily concentrated on the top 10 holdings with 65.8% of assets. The largest allocations go to Amazon, Home Depot and Wal-Mart (read: Wall Street Celebrates Amazon Q2: ETFs to Benefit).
Sector wise, specialty retail occupies the top position with less than one-third share, followed by double-digit allocation to hypermarkets, drug stores, Internet and catalogue retail, departmental stores, and health care services. The fund has amassed $223.5 million in its asset base while average daily volume is moderate at about 76,000 shares. Expense ratio came in at 0.35%. The product gained 0.5% over the past one month and has a Zacks ETF Rank of 1 with a Medium risk outlook.
PowerShares Retail Fund ((PMR - ETF report))
This retail fund provides diversified exposure across various market caps with 48% in small caps, 41% in large caps and the rest in mid caps. This is easily done by tracking the Dynamic Retail Intellidex Index. The fund has accumulated just $25.6 million in its asset base while trades in light volume of about 12,000 share a day. The ETF charges 63 bps in fees per year.
In total, the product holds 30 securities with none accounting for more than 5.62% of assets. In terms of industrial exposure, specialty retail takes the top spot at 53%, while food retail (19%) and drug stores (10%) round off the top three positions. PMR lost about 1.6% over the past one month and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (see: all the Consumer Discretionary ETFs here).
Disclosure: None.