Funds Watch: Are There Opportunities in Retail ETFs? (XRT, VCR, FXD, RPV, M)

Yesterday’s retail sales reports lit a fire under some of the retail stocks and a few ETFs that focus on the consumer discretionary sector.  We looked at three ETFs in the consumer discretionary space and one in value-oriented funds. The consumer funds are SPDR S&P Retail ETF (NYSE: XRT), Vanguard Consumer Discretionary ETF (NYSE: ETF), and First Trust Consumer Discretionary AlphaDEX (NYSE: FXD). The value fund is the Rydex S&P 500 Pure Value ETF (NYSE: RPV).

Retail stocks are cyclical, and the retail funds we looked at are themselves cyclical. Results are highly correlated to consumer spending, which is a function of consumer confidence and solid employment numbers with good wages.

We based our screen on a fund’s exposure to Macy’s Inc. (NYSE: M), which yesterday reported 6.7% same-store sales growth for June compared with June 2010. Macy’s also raised second quarter and full-year guidance. The company itself carries a forward P/E of 10.7 and a price/book ratio of 2.3. It posted a new 52-week high today, to put is range at $16.93-$30.58.

The SPDR S&P Retail ETF (NYSE: XRT) holds total assets of $672 million and a share price of $56.34, a new 52-week high compared with a low of $34.92. The tracks an equally weighted index that is rebalanced every quarter, which adds weight to small- and mid-cap holdings. The fund does hold some defensive stocks (Wal-Mart, Costco, Walgreen), but the majority of holdings are discretionary. Home improvement stores such as Home Depot and Lowe’s are not included in the index, and thus, not in the fund. XRT is also quite liquid, turning over nearly 11 million shares daily. The fund carries a 4-star rating from Morningstar.

The Vanguard Consumer Discretionary ETF (NYSE: ETF) holds assets valued at $387 million, and it too set a new 52-week intra-day high yesterday of $68.00, compared with yearly low of $45.50. The fund passively invests in the MSCI US Investable Market Consumer Discretionary Index, and currently owns 369 stocks. It too holds defensive stocks like McDonald’s, the fund’s top holding, and unlike XRT also owns home improvement stocks Home Depot and Lowe’s in its top ten holdings. The fund’s expense ratio is a very low 0.24%, but the shares are not very liquid, trading around 62,000 on an average day. The fund gets a 3-star rating from Morningstar.

The First Trust Consumer Discretionary AlphaDEX (NYSE: FXD) holds $644 million in total assets, and like the other retail funds posted a new 52-week intra-day high of $22.85 yesterday. The fund owns 124 stocks and tracks the StrataQuant Consumer Discretionary Index. It’s largest apparel retailer is Gap, Inc., which has not been a good performer year-to-date, returning a loss of nearly -16%. It’s largest defensive holding is Wal-Mart, which ranks fifth in the fund’s portfolio, two notches down from Gap. FXD trades an average of 236,000 shares/day and its expense ratio is rather high, at 0.70%. The fund has a 3-star rating from Morningstar.

The Rydex S&P 500 Pure Value ETF (NYSE: RPV) holds $125 in total assets and closed within $0.55 of its 52-week high yesterday. The fund tries to replicate the performance of the S&P 500 Pure Value Index. It hold just over 10% of assets in consumer discretionary stocks and another 14% in consumer staples defensive stocks. Its largest holding is Dean Foods, a defensive stock that has return more than 40% year-to-date. Its largest holding in a consumer cyclical is Gamestop, which has returned about 19% year-to-date. The fund trades an average of about 31,000 shares a day and its expense ratio is a low 0.35%. The fund carries a 2-star rating from Morningstar.

As we’ve already noted, these funds are cyclical and are heavily influenced by factors such as employment, gasoline prices, and weather. But as the outlook for retail sales is picking up, the second half of 2011 could lead to gains in these funds. XRT, with its bias toward small- and mid-cap holdings and its high liquidity, perhaps offers the best chance of taking advantage of an uptick in retail sales.

Paul Ausick