2 Retail ETFs To Play The Consumer Spending Surge
Consumer spending remained one of the bright spots in the GDP report released last Friday. According to the third estimate by the U.S. Department of Commerce, real personal consumption expenditure increased 4.4% in the fourth quarter, reflecting its biggest quarterly rise since the first quarter of 2006. The rate of increase was 3.2% in the third quarter. Factors including favorable labor market conditions, low gasoline prices and low interest rate were the main contributors to the gain.
According to the report, GDP grew at a pace of 2.2% in the fourth quarter, in line with the second estimate issued in February. However, the rate of growth was below the consensus estimate of a 2.4% gain. The rate of growth also lagged the 5% growth witnessed in the third quarter.
The report blamed the increase in the business inventories and decline in corporate profits for the slowdown. However, higher consumer expenditure prevented further slowdown. Additionally, real residential fixed investment, which increased at a rate of 3.8% against 3.2% in the third quarter, played an important role in limiting the decline in growth rate (read: all Consumer Discretionary ETFs here).
In a separate report, the U.S. Department of Commerce said that both personal and disposable personal income rose 0.4% in February. This was preceded by a 0.4% gain in personal income and a 0.5% rise in disposable personal income in January. Wages and salaries also witnessed a 0.3% increase in February that was again less than the 0.6% gain in January.
The U.S. Department of Labor reported that the economy generated 295,000 jobs in February, beating the consensus estimate of 235,000. The tally was also higher than January’s number of 239,000. These data indicate that the labor market is improving at an impressive pace and will thus help consumers to spend more in the coming months.
Meanwhile, the low level of oil prices remains one of the main contributors to the rise in consumer spending. Though crude prices registered gains in recent times, the overall trend remained negative. Last Friday, both crude and Brent slumped nearly 5% and extended their losses on Monday as well (read: Oil ETFs Crushed in Friday's Trading).
Higher consumer spending also gave a boost to the retail sector, which accounts for almost 30% of total consumer spending. Moreover, following the release of the GDP report, Consumer Discretionary Select Sector SPDR ETF (XLY) gained more than 1.3%.
Hence, banking on a favorable Zacks ETF Rank and strong fundamentals, here are two retail ETFs that may benefit from the improved sector dynamics.
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 heavily concentrated on the top 10 holdings with 64.2% of assets – the largest going to Wal-Mart (WMT), Amazon.com (AMZN) and Home Depot (HD). 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 $316.8 million in its asset base while average daily volume is moderate at 90,417 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 8.6% (read: Red-Hot Top Ranked Retail ETFs).
SPDR S&P Retail ETF (XRT - ETF report)
This product tracks the S&P Retail Select Industry Index, holding 102 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 1.19% 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 one-fourth share while specialty stores, automotive retail and Internet retail also have double-digit allocations. XRT is the most popular and actively traded ETF in the retail space with AUM of about $1.2 billion and average daily volume of nearly 2.4 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 5.8%.
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. ...
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