Online Retail: The Digital Cash Cow

12/30/2015 9:01 am EST

Focus: ETFs

Matt McCall

Founder and President, Penn Financial Group

There are a number of choices for investing in the retail sector via the ETF space, so Matt McCall, of Penn Financial Group, explores recent winners as well as companies that are struggling and why the varying levels of performance are due—in large part—to each ETF’s allocation to online retailers.

The holiday season may end up being much better for retailers than the experts had originally predicted. According to MasterCard Advisors SpendingPulse, US retail sales increased by 7.9% over last year, well above estimates. When automobiles and gas are removed from the numbers they still grew an impressive 5.5% between Black Friday and Christmas Eve. Online retailers were the big winners as online sales increased by an astounding 20%.

When it comes to investing in the retail sector there are a number of options for investors via the ETF space. However, investors must beware of the differences in options available.

For example, the three most popular ETFs that focus on the consumer have had varying levels of success this year. The Market Vectors Retail ETF (RTH) is up 9% in 2015 and hit a new all time high earlier this month. The SPDR S&P Retail ETF (XRT) is down 9% this year as it has underperformed its peer and the overall stock market. Also up 9% this year is the SPDR Consumer Discretionary ETF (XLY).

The varying levels of performance are due to the stocks that compose the portfolios of the ETFs. RTH has been able to outperform the sector and the market due to a large allocation to online retailer, Amazon.com (AMZN). The 15% weighting has the stock as the largest holding of the ETF. The stock is up 117% in 2015 and has powered RTH to a recent new all time high. Some of the other top holdings that are at or near highs are Home Depot (HD), Costco Wholesale (COST), and Lowe’s Co. (LOW).

On the other end of the spectrum is XRT, which has underperformed RTH by 1800 basis points in one year. The top holding in XRT only accounts for 1.2% of the entire portfolio and the 100 stocks in the ETF are evenly dispersed. This leaves AMZN with a mere 1.1% allocation. While the diverse approach works well when the entire sector is flourishing, it can be detrimental when it is a stock pickers market. And after a six-plus year bull market it has led to clear winners in the retail sector and companies that are struggling.

Looking out into 2016 it is clear that the trend is for online sales to continue to be strong. And the rebound in the housing market has been a positive boost to both HD and LOW. Therefore, RTH appears to be the best of the retail ETFs for the foreseeable future.

Matt McCall, Founder and President, Penn Financial Group

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