It’s been hard to find bright spots among domestic equity sectors lately. Oh, sure, there are utilities, but those have been horror shows on a year-to-date basis. Utilities pay nice dividends but who needs that kind of volatility?
Better momentum’s found among retailers which have been uptrending since mid-October. Well, let me rephrase that. There’s an uptrend that started in October. Presently, the retailers are in a bit of a congestion area. The question to ask now is whether this consolidation pattern is just a pause in a continuing uptrend or a signal of a rollover to lower prices.
Fundamentally, the case for retailers is good. The domestic economy is on a growth track, helped by lower oil prices and improvements in the job market. Consumer confidence and spending, generally, have been mounting apace. Retail sales make up nearly a third of all consumer spending which, in turn, represents two-thirds of the U.S. economy.
Search for ETFs tracking the sector and you’ll find three with “retail” actually in their names: the PowerShares Dynamic Retail ETF (NYSE Arca: PMR), the SPDR S&P Retail ETF (NYSE Arca: XRT) and the Market Vectors Retail ETF (NYSE Arca: RTH).
PMR’s underlying index is comprised of 30 stocks led by the likes of Kroger Co. (NYSE: KR) and Dollar Tree, Inc. (Nasdaq: DLTR). Urban Outfitters, Inc. (Nasdaq: URBN) and Orbitz Worldwide Inc. (NYSE: OWW) top the 100-stock index tracked by XRT. The RTH portfolio, just 26 stocks wide, gives greatest weight to Wal-Mart Stores, Inc. (NYSE: WMT) and Home Depot Inc. (NYSE: HD).
If you love large-cap retailers, RTH is your man. Fans of mid-cap outfits like XRT. PMR is a bit of mixed bag, but leans toward the smaller retailers. Therein, perhaps, lies the road map to the retail future.
PMR has the weakest correlation to the broad-based S&P 500; RTH has the greatest. PMR’s index methodology selects components on a variety of criteria including momentum and value metrics, not capitalization.
One-Year Performance vs SPY
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PMR | RTH | XTR |
| Sharpe Ratio | 1.24 | 2.06 | 1.02 |
| R-Squared | 41.55 | 66.52 | 45.98 |
| Beta | 71.19 | 86.21 | 89.44 |
| Alpha | 12.11 | 21.11 | 9.33 |
If you don’t want your retail play to be tethered to the prospects of the S&P 500, PMR may be your best technical bet now.
Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.
