With the holidays behind us and a new fund now having a full year’s performance for comparison, it’s a perfect time to look at retail ETFs.
The SPDR S'P Retail ETF (XRT) continued its dominance in 2012 in terms of both returns and investor interest.
XRT returned 20.7 percent for 2012, beating its two peers, the newcomer Market Vectors Retail ETF (RTH) and the PowerShares Dynamic Retail ETF (PMR). RTH returned 19.7 percent for the year while PMR returned 17.5 percent, according to total return data compiled by Bloomberg.
XRT holds more assets than its two peers combined, with $536 million versus $53 million for PMR and $34 million for RTH.
What’s new in the retail ETF space is the emergence of RTH as a viable alternative. RTH shed its old HOLDRs structure in December 2011 and started tracking a new index. The fund trades better than its modest assets under management suggest. Bid/ask spreads average just 5 basis points, and about $2.9 million changes hands daily last year.
To be clear, XRT is far more liquid, with tighter spreads of 3 basis points and far more volume, over $500 million per day, on average. With these numbers, XRT will continue to appeal to the most active traders. But the point is that investors can trade in and out of RTH fairly.
In contrast, PMR struggles somewhat with liquidity, trading at far wider spreads than either of its peers—23 basis points—and with less volume, about $520,000 a day.
XRT continues to trade with an interesting twist; namely, huge short interest. But the bottom line is that XRT’s massive shorts don’t threaten investors’ claims on underlying assets one bit, even though some investors might still be uncomfortable with short interest that sometimes exceeds the float.
Switching gears to look at each fund’s portfolio, we find significant differences. XRT uses equal weighting rather than the more typical market-cap weighting. This produces a massive bias toward smaller firms:XRT’s weighted average firm size is $9.9 billion compared with $72 billion for RTH. The general strong performance of small-caps may have aided XRT’s returns in 2012.
For 2013, investors should know that XRT will continue to heavily favor smaller retail firms.
PMR also favors smaller firms, with an average market cap of $26.2 billion. It aims to outperform the retail segment using quant-based stock selection rather than relying on market-cap weighting.
Of the bunch, RTH comes closest to a plain-vanilla cap-weighted industry fund. The list of top holdings shows how larger firms dominate the basket for RTH but play a diminished role in PMR, and especially XRT.
Familiar names like Walmart, Home Depot and CVS play a huge role in RTH’s portfolio. PMR also holds many of these names, but its weighting scheme is less reflective of the retail landscape. Still, some investors might prefer the reduction of single-name blowup risk if Walmart takes a huge hit.
XRT’s basket reads more like a small-cap sector fund. Sure, Walmart’s in there, but only at about 1 percent.
Again, XRT’s diversification may appeal to some, and its 2012 performance was strong, but investors expecting a plain-vanilla basket of stocks won’t find it in XRT.
The difference in the funds’ baskets shows up in the pattern of returns.
Each fund took a different path to similar end-of-year results. To me, this suggests that 2013 results could diverge significantly.
In short, I see two key takeaways here.
First, XRT continues to dominate the space regarding assets and liquidity, but its equal weighting significantly alters its exposure. I see XRT as a riskier fund, but one that paid off in the 2012 up-market.
Second, RTH, the newcomer, provides viable and much-needed viable plain-vanilla coverage of the space, and a good choice for those looking for a big, marketlike Walmart stake.
Of the three choices, PMR looks least attractive to me in view of higher all-in costs from higher fees—63 basis points versus 35 basis points for XRT and RTH—and higher trading expenses.
At the time of this writing, the author held no positions in the securities mentioned. Contact Paul Britt at email@example.com.
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