Buying Into Retail ETFs? Proceed With Caution

NEW YORK ( ETF Expert) --Holy Home Depot ( HD), Target ( TGT) and eBay ( EBAY)! The volume of e-mail offers from traditional and non-traditional retailers this Black Friday has thoroughly overwhelmed my smartphone. (It's not a genius phone... that's for certain.)

Yet, for all the hoopla surrounding "day-after deals," investors may want to resist the hype. Bespoke researchers have found that, since 2000, S&P 500 retail stocks have averaged a 0.8% gain from Thanksgiving day through the Christmas holiday. In contrast, the broader S&P 500 has averaged nearly twice that amount (1.4%).

Should ETF advocates looking to cash in on retail stock enthusiasm rethink consumption assumptions? Or will the combination of Charcoal Gray Thursday and dot-com bargain hunting change the pattern of the prior decade? My sense is that the pattern will remain the same.

Consider the mainstream media's effect on investor emotionality. The publicity began in grand style with countless stories regarding discounters opening their doors early. Similarly, the National Retail Federation expressed that it expected holiday season sales to surge 4.1%.

Meanwhile, Wal-Mart ( WMT) put out a release for what it described as its "best ever" series of sales promotions. Macy's ( M)went out of its way to talk about its record crowds at its flagship New York location.

All of that "info" would seem very bullish for the retail sector, wouldn't it? On the other hand, most of these expectations were previously priced in by Retail ETFs during the month leading up to the season.

To illustrate the point, I compiled a list of the most popular retail-related ETFs alongside their month-over-month percentage returns. Granted, the prior month for all stock assets had been plagued by fiscal cliff fears. Nevertheless, it's not difficult to see that Retail ETFs held the relative performance edge over the heralded large-cap U.S. stock universe.

  • PowerShares Dynamic Retail Portfolio ( PMR), 1.6%
  • SPDR S&P Retail ( XRT), 1.4%
  • SPDR S&P Consumer Discretionary ( XLY), 1.3%
  • Market Vector Retail ( RTH), -0.6%
  • PowerShares Dynamic Leisure and Entertainment ( PEJ), -1.1%

By comparison, the SPDR S&P 500 Trust ( SPY) was down 1.9%.

Momentum investors might look at these results and conclude that retailers are the place to profit for several more months... or at least shelter against tense congressional negotiations. If history is any guide, though, Retail ETFs are likely to fade a bit in the final month of 2012.

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