Beware the Wal-Mart Supplier ETF

I couldn't find a chart comparing XLP to WSI, but there are data. WSI's benchmark index was up 2.28% for the year through Sept. 30, up 13.45% for the 12 months ended Sept. 30 and up a cumulative 23.52% for the three years ended Sept. 30.

By comparison, XLP is up 8.4% for the year-to-date through Sept. 30, up 12.0% for the 12 months ended Sept. 30 and up a cumulative 36.48% for three years ended Sept. 30.

WSI's three-year return is a bit of a surprise, considering how well smaller companies have done through most of the current stock market cycle. If there is a fundamental explanation for this, it might be Wal-Mart's ability to squeeze its suppliers.

We're always hearing that Wal-Mart's size allows it to demand better pricing. Consider the plight of Cal-Maine Foods (CALM Quote): It gets 36% of its revenue from Wal-Mart, so if Wal-Mart tells the company to lower its prices by 3%, it might be very difficult to say no.

It strikes me that the relationship between Wal-Mart and its suppliers could be testy at times. Too much reliance on a single customer is often cited as a reason to sell a stock, not buy it. WSI may turn out to be a great product, but for now I am very skeptical.