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Retail ETFs Face Uncertainty

NEW YORK ( TheStreet) -- As the economy starts to recover and consumers start to come out of their shells, retailers have begun to reap the benefits of extra spending, and some are taking steps to retain customers.

However, it remains unclear whether these bullish trends are sustainable.

According to the most recent report issued by the Commerce Department, a range of retailers boasted month-over-month gains, boosting the sector as a whole to a seasonally adjusted increase of 0.3% in February over January. Additionally, a Thomson Reuters index of 28 retailers indicates that sames-store sales (those at stores open at least one year) rose 4% in February compared with a year ago.

Of all the retail subsectors, electronics and appliances saw the largest gains, followed by groceries. Despite wary consumer sentiment over the health of the economy, illustrated by the recent decline to 72.5 in the University of Michigan/Reuters consumer sentiment index, some retail experts suggest that consumers see the light at the end of the tunnel and are starting to upgrade their appliances and add additional items to their shopping baskets at the checkout line.

A second force behind recent retails gains is retailers' adaptation to recession-induced frugality. Retailers have restricted inventories and introduced lower-cost products that are helping increase foot traffic.

High-end retailers Prada and Gucci tweaked their brands and product line to adjust to the price-conscious consumer.

Wal-Mart (WMT) has also taken steps, after noticing a recent decline in traffic. The world's largest retailer has announced that it will use aggressive pricing in grocery and other categories to attract shoppers and construct an environment where prices are too good to pass up. More specifically, the company is expected to roll back prices on 10,000 items, primarily focusing the cuts on food and other consumables.

Although consumers are willing to spend and retailers are making it easier to spend, macroeconomic factors are likely to put a damper on this upward trend.

Wages remain stagnant, consumers are taking on large sums of debt and credit still remains difficult to obtain. These are all factors that cause disposable income to dwindle. To make things even more challenging, unemployment rates are likely to remain elevated for an extended period and may even rise in the near term as some unemployed workers start to hunt for jobs again.
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