ETF Plays for a Retail Recovery

By Michael Johnston, founder of ETF Database

In the latest sign that this recovery just might have some staying power, several major retailers reported strong earnings reports for the third quarter. But along with these pleasant surprises came warnings of tough times ahead, and forecasts for the upcoming holiday season remain murky. The companies that have reported earnings so far this week run the gamut from high-end stores to bargain-basement discounters.

High-end retailer Saks ( SKS) posted a profit for the first time in six quarters by cutting expenses and avoiding the temptation to push promotions and clearance discounts amid falling sales. Instead, Saks has been working with suppliers to lower prices on designer goods, allowing the company's stores to sell more luxury brands starting at lower prices. "I think there have been some changes in the luxury consumer," Chief Executive Steve Sadove said on a call with analysts. "People are very much focused on value."

Meanwhile, Target ( TGT) posted an 18% jump in third-quarter earnings on stronger gross margins. But the trendy discounter also warned that November sales have been soft and that expectations for the fourth quarter were low. CEO Greg Steinhafel was surprisingly blunt in his assessment of the importance of this year's Black Friday, saying that "the fourth quarter will be decided by the two days after Thanksgiving and the two days before Christmas."

Elsewhere, The TJX Companies ( TJX), which owns off-price retailers T.J. Maxx and Marshalls, reported a profit of $347.8 million for the quarter ended Oct. 31, a significant jump from $235.9 million in the same quarter last year.

Wall Street has always paid close attention to consumer behavior on Black Friday and during the run-up to the holidays. This year, however, that scrutiny will be particularly intense, because many retailers need robust sales during the next five weeks to salvage what has been a disappointing year.

ETFs for Retail Bets

For investors looking to make a play on the retail sector, there are several ETF options.

SPDR S&P Retail ETF ( XRT): This ETF tracks the S&P Retail Select Industry Index, offering diversified exposure to both brick-and-mortar retailers like Wal-Mart ( WMT), Target and Best Buy ( BBY) and online merchants such as Amazon.com ( AMZN). XRT has been one of the best performing sector-specific ETFs this year, gaining about 75%.

PowerShares Dynamic Retail Portfolio ( PMR) (PMR): This ETF is based on an "Intellidex" benchmark that seeks to identify stocks poised for outperformance through proprietary quantitative analysis. About 65% of PMR's holdings are allocated to consumer discretionary stocks, with 22% to consumer staples and the remainder to industrials and technology companies. PMR has gained about 25% year to date.

Claymore/Robb Report Global Luxury Index ETF ( ROB): As this ETF's name suggests, it focuses primarily on purveyors of luxury goods, including Swatch, Christian Dior, and BMW. As consumers have begun making big-ticket purchases once again, ROB has surged, gaining more than 50% so far this year.

Michael Johnston is the senior analyst and founder of ETF Database, a Web-based investment resource providing actionable ETF investment ideas and an ETF Screener for investors analyzing potential ETF investments. Johnston oversees ETF Database's free ETF Newsletter, one of the most popular sources for news and commentary focusing exclusively on the exchange-traded fund industry. Johnston also maintains and develops content for ETFdb Pro, a line of analyst reports and model portfolios designed to help investors utilize ETFs to meet their investment goals.

Johnston has completed the Chartered Financial Analyst (CFA) program, and obtained his bachelor's degree in finance from the University of Notre Dame. Prior to founding ETF Database, Michael worked in a private client service group performing valuations of companies operating in a wide range of industries.

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