The holiday season is kicking off this week with Thanksgiving Day and Black Friday in the spotlight. And retailers have a tradition of tapping this fervor the most as about 25-40% of sales comes during the holiday season.

In fact, retailers have been the clear outperformers in the stock market in the week leading to Black Friday and in the days thereafter. Per Kensho, a group of S&P 500 retail stocks, on average, has generated 5% returns in the period spanning one week before to one week after Black Friday since 2007. This is compares favorably with average returns of 3% for the S&P 500 and 4.5% for consumer discretionary stocks.

This holiday season will also be no different with an expected surge in retail stocks. Retailers are splurging on promotions, early-store openings, heavy discounts, as well as free shipping on online purchases to lure customers. Additionally, encouraging economic and industry fundamentals, strong earnings as well as a bullish stock market are laying a strong foundation for the holiday season.

Encouraging Fundamentals

Growth in the U.S. economy has been steady. GDP expanded 3% year over year in the third quarter, following 3.1% growth in the second quarter. This represents the best back-to-back quarters of at least 3% growth since 2014. Unemployment dropped to the lowest level since December 2000 to 4.1%.

Americans have an optimistic view of the economy with confidence hitting the highest level in almost 17 years. The Conference Board consumer confidence index jumped to 125.9 in October from a revised 120.6 in September. Meanwhile, consumer spending, which accounts for more than two-thirds of U.S. economic activity, recorded its biggest increase in more than eight years in September. Retail sales unexpectedly rose 0.2% in October followed by a revised 1.9% jump in September.

Solid Sales Forecast

According to data compiled by the National Retail Federation (NRF), about 69% of shoppers (164 million) plan to binge during the Thanksgiving weekend. Of these shoppers, 20% plan to make their purchases on Thanksgiving Day (32 million) and 70% on Black Friday (115 million), the busiest holiday day. A substantial 43% are expected to shop on Saturday (71 million), 21% to shop on Sunday (35 million), and 48% to shop on Cyber Monday (78 million).

Overall, holiday sales, online and in stores, are expected to grow as much as 4% for November and December to $682 billion. This is higher than last year’s growth of 3.6% and the five-year average of 3.5%.

According to RetailMeNot’s survey data, consumer spending over the Black Friday weekend is expected to increase 47% to an average $743 per person from $505 last year.

Solid Earnings

The retail sector is getting a boost from a slew of better-than-expected earnings and the increased full-year outlook lately. This signals that retailers are optimistic about their holiday plans. Per the Earnings Trends, retail sector revenues from constituents of the S&P 500 index are expected to rise 7.8% in the holiday quarter to $512.1 billion. The rate is much higher than 6.5% growth for the S&P 500 companies as a whole.

Trump Trade Resurgence

After fizzling out in summer, Trump trade resurgence has led to increased confidence in the last several months. The latest catalyst has been the tax reform plan, which was approved by House Republicans and is now only needs to get through the Senate. Though the House and Senate tax bill versions differ on various fronts, there is still hope that the biggest U.S. tax overhaul in three decades would come by the end of this year or early next year. This will continue to keep the bull trend alive.

ETFs to Consider
 
In view of the reasons discussed above, we strongly believe that investors should consider retail ETFs. We have highlighted five of these that provide a broad exposure to the sector:

SPDR S&P Retail ETF (XRT - Free Report)

This product tracks the S&P Retail Select Industry Index, holding 87 securities in its basket with none accounting for more than 1.61%. Apparel retail takes the top spot at one-fourth share while Internet & direct marketing, automotive retail, and specialty stores round off the next three spots with a double-digit allocation each. The fund has amassed $440.7 million in its asset base and charges 35 bps in annual fees. The fund gained nearly 4% last week and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

VanEck Vectors Retail ETF (RTH - Free Report)

This fund provides exposure to the 26 largest retail firms by tracking the MVIS US Listed Retail 25 Index. It is highly concentrated on the top firm, Amazon (AMZN), at 18.6% while other firms hold no more than 7.6% share. The ETF has a certain tilt toward specialty retail, which accounts for 31% share while Internet & direct marketing (22%), hypermarkets (12%) and departmental stores (10%) round off the next three spots. The product has amassed $52.4 million in its asset base and charges 35 bps in annual fees. RTH has gained 2% last week and has a Zacks ETF Rank #2 with a Medium risk outlook.

PowerShares Dynamic Retail Portfolio (PMR - Free Report)

This fund follows the Dynamic Retail Intellidex Index. In total, the product holds 29 securities, with each holding no more than 5.9% of assets. In terms of industrial exposure, specialty retail takes the top spot at 41%, while hypermarkets (14%), department stores (13%), and drug stores (10%) round off the top three positions. The fund has accumulated just $13.7 million in its asset base and charges 63 bps in fees per year. It was up 3.2% last week and carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

First Trust Nasdaq Retail ETF (FTXD - Free Report)

The fund follows the Nasdaq US Smart Retail Index and holds 48 stocks in its basket. It is moderately concentrated across components, with each firm holding less than 9.4% of assets. While broadline retailers make up for a bigger chunk at 27.3%, specialty retailers, apparel retailers, home Improvement retailers and drug retailers also account for a double-digit allocation each. FTXD has accumulated $1 million in its asset base and has an expense ratio of 0.60%. It added 2.3% last week and has a Zacks ETF Rank #2.

Amplify Online Retail ETF (IBUY - Free Report)

This ETF has attracted $132.9 million in its asset base. It offers global exposure to companies that derive 70% or more revenues from online and virtual retail by tracking the EQM Online Retail Index. The fund is home to 38 stocks that are widely diversified, with each holding no more than 4% of assets. The product charges 65 bps in fees per year and gained 1.7% last week.