NEW YORK (
) -- Retailers are set to unleash their fourth quarter earnings on the market, with
report due before the market opens on Thursday.
report as well.
Investors can play these reports with an ETF that has large positions in these companies, or play the broader impact of their reports with a more diversified retail ETF.
While retail stocks are found in many consumer ETFs, investors looking for a pure play have limited options due to liquidity. In the end, there are just two funds worth considering:
SPDR S&P Retail
For investors searching for a diversified ETF, the choice is XRT. This fund has 62 holdings. Its No. 1 holding
accounts for less than 2% of the fund's assets and the smallest holding,
has 1.3% of assets. Assets are rebalanced quarterly and the expense ratio is 0.35%.
Besides spreading assets evenly across all the holdings, the positions themselves are spread across the retail universe. Its top 10 holdings range from the aforementioned Sears to
(OMX). Individual investors with limited capital would have a hard time replicating the holdings in this ETF, in addition to holding their expenses low.
That's not the case with the Retail HOLDRS. RTH, which has only 18 holdings and very unevenly distributed assets. Wal-Mart accounts for 20.8% of assets, followed by 12.8% in Home Depot, 8.7% in
, 8.6% in Target, 6.9% in Walgreen and 6.9% in Lowe's.
By adding the holdings in
to Wal-Mart, a quarter of the fund is in discount retailers. One-fifth is in the two home-supply stores, while pharmacies grab 12% of assets. Notably, while RTH has almost 20% in the home improvement stores, XRT has 0% of assets in these retailers.
The downside to RTH is the overweighting in single companies and sectors, but that's also the potential upside. Investors willing to do a little more homework may find a reason to be overweight these sectors or firms, and RTH allows them to do so easily at a very low cost of $0.08 per share, which comes out to an expense ratio of about 0.09% based on the current price per share. Part of the reason costs are low is because RTH does not rebalance.
The diversity in the portfolios has led to periodic differences in performance. Since the inception of XRT in June 2006, returns have actually been quite similar, with both funds down less than 5% over that time frame. However, in the year from November 2007 to November 2008, XRT lost nearly 40% while RTH fell only 20%. The S&P 500 was down about 35% in the same period. Wal-Mart actually gained during this period and that explains much of the outperformance in RTH.
Due to that previous underperformance and the subsequent economic recovery and stock market rally, XRT gained 82% in the past year through Feb. 16 compared to a 39% gain in RTH. The S&P 500 Index gained 35% over the same period. Wal-Mart is up only 18% in the past year.
Going forward, investors will have to decide for themselves whether the current economic and stock market conditions favor RTH or XRT. On that score, year to date, despite continued high unemployment and a stock market sell-off, XRT leads RTH by about 2%.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion did not have any positions in the equities mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.