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Dissecting Two Retail ETFs

NEW YORK ( TheStreet) -- In light of holiday shopping on Thanksgiving Day, the long-standing tradition of Black Friday and the newer tradition of Cyber Monday, investors will be thinking about investing in the retail industry and may look at the SPDR S&P Retail ETF (XRT).

Early reports from the National Retail Federation are that 141 million people shopped over Thanksgiving weekend this year compared with 139 million people last year but that the average spent fell to $407 from $423 last year. The Wall Street Journal cited a report from ShopperTrak that predicts this holiday season will be the worst since 2009.

A slowdown in holiday sales lends support to the idea that quantitative easing is losing its effectiveness. Holiday sales are very important to retailers, accounting for as much as 20% of the year's revenue according to that same Wall Street Journal article.

XRT has attracted $1.4 billion in assets and has rallied 41% in 2013, well ahead of the 27% logged for the S&P 500.

Apparel retailers such as the Men's Wearhouse (MW) comprise 28% of XRT, followed by specialty retailers such as Vitamin Shoppe (VSI) at 16% and automotive retailers at 13%. Internet retailers such as Amazon (AMZN) and Expedia (EXPE) account for another 10% of XRT.

XRT takes essentially no single stock risk. Its largest holdings have only about 1.5% weightings. It has 99 total holdings, charges an expense ratio of 0.35% and has a trailing dividend yield of 1.08%.

XRT is not the only retail exchanged-traded fund. The PowerShares Dynamic Retail Portfolio (PMR) has actually been trading eight months longer than XRT, but with only $40 million, it has not gained anywhere near XRT's acceptance as a proxy for the group.

PMR has just 30 holdings, nine of which have between 4-6% weightings in the fund. A 5% weighting to a few stocks doesn't expose fund holders to unreasonable risk. PMR has a trailing yield of 1.92%, and the fund charges a higher expense ratio than XRT does at 0.74%

The funds have traded similarly this year with the slight performance advantage going to XRT's 41% to PMR's 39%.

The differences in the funds' compositions could result in more meaningful performance divergences. PMR allocates 48% to retailers such as Wal-Mart (WMT) and Safeway (SWY), whereas XRT allocates only 8.2% to these types of retailers. The distinction is that sales at a supermarket or drugstore will be less volatile during an economic downturn than sales at more discretionary retailers, which make up a larger part of XRT.
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