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Capture Wal-Mart's Success With This ETF

A fund capturing the retailing giant's suppliers may be a good way to diversify.

As talk of a recession has intensified, it might not be surprising that the price of Wal-Mart Stores Inc. (WMT) - Get Walmart Inc. Report has been moving steadily higher. Its reputation as a low-price leader as well as its increasing exposure to consumer staples (such as food) would be expected to help it maintain sales in an economic downturn.

Thursday's announcement that Wal-Mart's same-store sales in March rose while other major retailers suffered severe declines lifted its stock by more than 2%, continuing a steady ascent that began in September. Its share price has climbed from the low 40s last autumn to its current level in the mid-50s.

Also helping to lift its share price was a revision by Wal-Mart of its first-quarter earnings per share to the 74-to-76-cent range from its previous level of 70 cents to 74 cents.

An interesting fund opportunity exists for believers that Wal-Mart might provide a refuge from the uncertain economic climate, but who desire the diversification provided by an investment in a portfolio of holdings.


FocusShares ISE-Revere Wal-Mart Supplier Index ETF


tracks the performance of companies that derive a substantial portion of their respective revenues from Wal-Mart. It has the advantages of a linkage to the retail giant's possible immunity to a recession as well as diversification spread across the spectrum of consumer purchases.

A fund focusing on the retail industry containing Wal-Mart as a portfolio holding might not make as much sense as WSI as a recession play. The retail-industry fund would likely contain holdings such as

Gap Inc.

(GPS) - Get Gap Inc. (The) Report

, whose same-store sales tumbled 18% in March, and

J.C. Penney

(JCP) - Get J. C. Penney Company, Inc. Report

, off 12.3% for the month in same-store sales.

The Wal-Mart-related ETF was launched at the end of November and has been generally priced at a slight premium over its net asset value per share. Its premium of 0.60% at the end of March represented more of a departure of price from NAV than most ETFs, but was significantly less than a typical closed-end fund.

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After ending 2007 at $46.72 per share, the fund eased to $42.70 in late January and has recovered back into the mid-40s range.

WSI's holdings represent an eclectic mix of companies that supply the everyday needs of consumers. That variety of food, household supplies and toys are reflected in its top holdings, which includes


(MAT) - Get Mattel Inc. Report



(K) - Get Kellogg Company Report


General Mills

(GIS) - Get General Mills Inc. Report



(CLX) - Get Clorox Company (The) Report



(ATVI) - Get Activision Blizzard Inc Report


While the major suppliers to the nation's largest retailer will maintain their respective sales volumes, assuming price-conscious shoppers keep visiting Wal-Mart during the economic downturn, they might not be completely immune from pressures on their profit margins. The retail colossus also has a reputation for squeezing every possible percentage point from its suppliers' margins.

So investors who feel that WSI makes sense as possible insulation from an economic downturn must decide if the possibility of maintenance of sales volume by Wal-Mart suppliers is worth the risk that the retailer may squeeze profits from companies in the ETF's portfolio.

FocusShares ISE-Revere Wal-Mart Supplier Index ETF

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Richard Widows is a senior financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.