Data, Fed Put Retail ETFs in Focus

The SPDR S&P Retail ETF (XRT) and the Market Vectors Retail ETF (RTH) , along with other ETFs with heavy retail and consumer discretionary exposure will be in the spotlight today with readings of consumer sentiment and retail sales on the data docket.

Retail ETFs have been one of the better performing areas this year, so investors will be eying Friday’s data points for continued strength in the sector. Overall retail sales are expected to have risen 0.5% last month after a 0.2% increase in July, but excluding cars, gasoline and building materials, the estimate is just a 0.3% for August after a 0.5% rise in July. [Retail ETFs May Ring up Gains on Sales]

Friday’s consumer-related data and how impacts ETFs like XRT may have added significance ahead of next week’s Federal Reserve meeting. Expectations are in place that a recent spate of strong U.S. data points has given the Fed room to taper its quantitative easing program. Some are expecting initial tapering to result in $10 billion being trimmed from the Fed’s $85 billion in monthly bond purchases.

Over the pas three months, yields on 10-year U.S. Treasuries have risen 30.4% while XRT has gained 4.6%. “The impact of interest rates and looser lending standards on auto sales, which last month hit their postcrisis high on an annualized basis, is clear. Borrowing per vehicle has risen sharply even as typical monthly payments have fallen slightly since 2008,” reports Spencer Jakab for the Wall Street Journal.

While retail and discretionary names have proven somewhat sturdy as interest rate-sensitive sectors have languished in the face of rising Treasury yields, there could be reasons for concern with XRT and related ETFs if rates continue to rise.

“As the Federal Reserve is set to slowly reduce the pace of its asset purchases, the gap between 10-year Treasury yield and consumer confidence has begun to converge. Today, economic conditions as measured by consumer confidence would suggest that the 10-year real yield should be around 50 basis points higher if monetary policy were to normalize,” wrote Scott Minerd, global chief investment officer and a managing partner of Guggenheim Partners.

Consumer spending powers about 70% of the U.S. economy and consumer discretionary and retail ETFs have been stellar performers as U.S. stocks have ascended to record highs. However, higher borrowing costs, no matter good the data, could derail these ETFs if the Fed earnestly moves to taper.

SPDR S&P Retail ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.