A Way to Play the New Frugality

09/17/2009 12:00 pm EST

Focus: ETFS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of ETF Trader, has found an ETF that’s heavily weighted towards discount retailers as a way to invest in Americans’ new focus on saving money.

We've been hearing news that the worst of the recession may be over. This optimistic view was fueled by a push in the Standard & Poor’s 500 index above the psychologically significant 1,000 mark.

The recovery in stock prices has restored some sense of financial security to consumers, but even if they do start spending, they likely will be watching their pennies. With worries about the rising unemployment rate and with 2008's market drop a not-too-distant memory, consumers not only seem to be spending cautiously, but boosting savings and reducing borrowing.

A March study of consumer habits showed that savings as a percentage of income among Americans is expected to climb to 14.3% next year from 0.6% in 2006. This diversion of dollars from spending to saving has a great impact on retailers.

Americans borrowed less for the sixth consecutive month in July, according to the Federal Reserve. Total borrowing, consisting of consumer loans other than mortgages, decreased at a 10.4% seasonally adjusted annual rate in July 2009 to hit $2.47 trillion. July's $21.6 billion drop from June 2009 was a record decline, with total credit falling at a 7.4% annual rate in June. Retailers and marketers should beware: The cost-conscious consumer is here to stay.

What this means is that bargain retailers could be ready to ring the register.

One exchange traded fund (ETF) that I've had my eye on to profit from a change in buying habits is the SPDR S&P Retail (NYSEArca: XRT), [which] is designed to track the total return performance of the S&P retail select industry index. The fund is heavily weighted toward discount-oriented stores.

As shoppers look for bargain prices during the recession, discount retailers such as those in XRT's portfolio have seen relatively strong sales.

TJX Cos. (NYSE: TJX), which operates T.J. Maxx, HomeGoods, and other discount formats, is seeing its same-store sales rise as consumers look for value. The company said its same-store sales rose 4% in July, beating Wall Street's forecast for a 2.3% increase from July of last year.

For the second month in a row, Kohl's (NYSE: KSS), an operator of midpriced department stores, posted increased sales at stores open at least a year. It reported an increase in sales of 0.2%, topping the 1.7% decline that analysts forecasted.

Retailers, including Costco Wholesale (Nasdaq: COST), reported that more shoppers visited their stores last month than a year ago. Target (NYSE: TGT), which announced a 2.9% sales decline—much narrower than analysts forecasted—has started to emphasize competitive prices in its newspaper ads and store signs.

By concentrating on stores that offer quality items at a reduced price, XRT's share price has been climbing [in] a clear up trend since late March.

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