2 Retail ETFs To Gain On Solid Labor & Housing Data
Minutes from the Federal Open Market Committee’s (FOMC) Apr 28-29 meeting that released on Wednesday indicated that a rate hike in June is “unlikely” following concerns regarding weak economic growth. According to the minutes, Fed officials will consider a rate hike if labor-market conditions show “further improvement” and the economy achieves the targeted inflation rate.
Meanwhile, Fed officials blamed “transitory factors” for the first-quarter slowdown and said that the massive drop in the first-quarter GDP growth rate is temporary. They expect the economy to recover soon. While housing numbers and employment growth picked up in April, industrial production, producer price index, consumer sentiment and retail sales numbers were discouraging.
Q1 Slowdown
According to the “advance estimate” released by the Commerce Department, the first quarter GDP grew at a sluggish pace of 0.2%, significantly lower than the consensus estimate of a rise of 1%. The sluggish growth rate in the first quarter was preceded by a 2.2% gain in the fourth quarter and a 5% rise in the third.
Slump in exports following a stronger dollar, contraction in business spending and disappointing growth in consumer expenditure were the main reasons behind the slowdown. Though the Fed labeled these factors as “transitory,” their impact including the slump in oil prices and the strong dollar are likely to continue for a significantly longer time frame. In this situation, the Fed may find it difficult to achieve its 2% inflation rate target in the near time, which will further reduce the possibility of a rate hike in the near future (read: 3 Rate-Sensitive ETFs to Watch Post Fed Meeting).
Labor & Housing Market Recovery
Despite concerns about economic growth, encouraging data indicated that labor and housing markets are recovering at an impressive rate. According to the U.S. Labor Department, the economy added 223,000 new jobs in April, compared with only 85,000 in March. Moreover, the unemployment rate declined further in April to 5.4%, gradually getting closer to the Fed’s target. This was also the lowest level since May 2008.
On the other hand, after being hit by a severe winter in the first quarter, the housing market started to show signs of a spring rebound. The U.S. Department of Commerce reported that privately owned housing starts surged 20.2% to 1,135,000 in April from March’s revised tally of 944,000. Construction on new homes climbed at the fastest pace in April since late 2007, banking on a rise in single-family housing starts. Meanwhile, building permits increased at a rate of 10.1% in April to 1,143,000, more than the consensus estimate of an increase to 1,062,000 (read: Upbeat Data Fuels Optimism in Housing Stocks and ETFs).
Retail to Gain
The low-rate environment, combined with a recovery in labor and housing markets, may boost consumer expenditure in the upcoming days. The retail sector significantly benefited from higher consumer spending as expenditure in retail sector represents almost 30% of consumer spending. Moreover, the sector witnessed an impressive first-quarter earnings season despite the winter chill.
As of May 14, total earnings for 24 retailers out of 41 S&P 500 (SPY) retail companies were up 6.8% from the same period last year, on 10.9% higher revenues, with 87.5% beating EPS estimates and 50% coming in ahead of top-line expectations. The sector’s earnings beat ratio was the highest of all 16 sectors and its revenue beat ratio was only behind the Medical sector (read: Retail ETFs in Focus Ahead of Big-Box Earnings).
Here we highlight two Retail ETFs that are poised to gain from this favorable economic scenario.
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, heavily concentrated in the top 10 holdings with 63.9% of assets. Sector-wise, specialty retail occupies the top position with around one-third share, followed by double-digit allocation to hypermarkets, drug stores, departmental stores, and health care services.
The fund has amassed $355.2 million in its asset base while average daily volume is moderate at 97,674 shares. Expense ratio came in at 0.35%. The product has a Zacks ETF Rank of 1 (Strong Buy) with a Medium risk outlook and a year-to-date return of 6.8% (read: 2 Retail ETFs to Play the Consumer Spending Surge).
SPDR S&P Retail ETF (XRT - ETF report)
This product tracks the S&P Retail Select Industry Index, holding 103 securities in its basket. The fund charges 35 bps in fees. It is widely spread across each component as none of these holds more than 1.5% of total assets. Small-cap stocks dominate more than half of the portfolio while the rest have been split between the other two market-cap levels.
Sector-wise, apparel retail takes the top spot at around one-fourth share while specialty stores, Internet retail and automotive retail also have double-digit allocations. XRT is the most popular and actively traded ETF in the retail space with AUM of about $984.9 million and average daily volume of nearly 2.3 million shares. The fund has a Zacks ETF Rank of 2 (Buy) with a Medium risk outlook and has a year-to-date return of 3.7%.
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