How to Play Retail as Consumer Tightens Belt

Retail-focused ETFs have declined less than funds in many other sectors of the market, but whether they can continue outperforming is subject to debate.

Year-to-date, the PowerShares Dynamic Retail Fund(PMR Quote), the Retail HOLDRs Fund(RTH Quote) and the SPDR S&P Retail Fund(XRT Quote) are down 4.5%, 6.0% and 11.3%, respectively. These funds have held up well compared with the S&P 500, which is down 13.7% so far this year.

Now, some market observers are saying the retail sector may be the next to crack.

Ken Perkins, president of Retail Metrics, sees macroeconomic conditions as being a major challenge for the retail sector.

"Certainly the next year or so is going to be dicey, to say the least," he says. "Some of the weaker players will be shaken out. Once the price of gas went above $4 a gallon, it really began to impact consumer psychology."

Perkins cites a tight job market as being a potential drag on the retail sector.

"We see job losses continuing through the rest of the year," he says. "It could be very tough sledding over the next year or so."

Changing Demographics

Potential changes in spending habits could also prove to be an obstacle for retailers in the not too distant future.

"The industry is going to be really challenged for the next few years," says Keith Springer, president of Capital Financial Advisory Services. "We are turning from a nation of spenders to a nation of savers."

Springer believes that changing demographics could lead to a decline in consumer spending.