Should You Keep Holding the Retail ETFs? - ETF News And Commentary

While almost all investors thought that we would have a happy start to the New Year, the recent retail sales data has come out as a big surprise for many. U.S. retail sales for the month of December fell 0.9% – the largest decline in 11 months – below the expectations of a 0.1% decline. The dip was annoying given that the market was expecting the retail sector to be one of the biggest beneficiaries of the crude oil slump.

The key factor behind the decline was a 6.5% slide in gasoline sales – the biggest fall since Dec 2008. Moreover, declines in receipts at electronic and appliance, clothing, building materials and garden equipment stores, as well as auto dealerships also led to lower retail sales.
However, sales fell 0.4% last month after rising 0.6% in November even after excluding automobiles, gasoline, building materials and food services.

The somewhat disappointing set of data comes just after the World Bank revised downward its global growth forecast for the year. The World Bank has cut its 2015 global growth forecast to 3% from 3.4% because of sluggishness in the Euro zone, Japan and some major emerging economies (read: Copper ETFs Tumble as World Bank Cuts Global Growth Forecast).

ETF Impact

The retail sales data, combined with global growth concerns and a continued slide in commodity prices, led key U.S. equity market benchmarks to close with losses for the fourth straight session on January 14 (read: 3 Buy-Write ETFs to Protect Against Market Volatility).
In fact, the weaker set of data has raised expectations that the Federal Reserve might delay its first interest rate hike to later in the year as against the current market expectation of a hike this June.

SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, fell 0.6% after the lackluster data and is down 1.7% in the year-to-date frame.

Moreover, the panic in the market pushed the yield on the 30-year U.S. Treasury bond to a record low as investors sought safety. As a result, iShares 20+ Year Treasury Bond ETF (TLT) gained roughly 1% as investors bought long-dated U.S. government bonds for safety.
Moreover, all the three retail ETFs – SPDR S&P Retail ETF (XRT), Market Vectors Retail ETF (RTH) and PowerShares Dynamic Retail Portfolio (PMR) – closed in the negative following the retail sales data. RTH lost the most, down 1%, on January 14.

Should You Hit The Panic Bottom and Dump Retail ETFs?

December’s surprise decline in retail sales seems to hint at a disconnect between the consumer saving money at the pump but not putting those savings into spending over the holiday season (read: Best ETF Strategies for 2015).

However, with a strengthening labor market, rising consumer confidence and falling crude prices, many experts believe that last month’s fall in core retail sales is just a temporary phenomenon and that sales for January should bounce back.

“Massive boost to consumers' wallets as a result of the rapid decline in gasoline prices, suggests that January could be a big month that reverses much of the December drop," says Bricklin Dwyer, a senior economist at BNP Paribas in New York.

Moreover, data from the National Retail Federation revealed that 2014 retail holiday sales excluding automobiles, gasoline stations and restaurants increased 4% from a year earlier, the fastest since 2011 (read: Favorite Sectors of Q4 and Their Rewarding ETFs).

Given this, investors shouldn’t read too much into the December retail sales data and rather continue to hold on to the above mentioned retail ETFs. We currently have a Zacks ETF Rank #2 or Buy rating on XRT and a Zacks ETF Rank #3 or Hold rating for PMR and RTH.
We believe that lower oil prices, a perked-up job market and low interest rates will continue to benefit this space.

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SPDR-SP RET ETF (XRT): ETF Research Reports
 
MKT VEC-RETAIL (RTH): ETF Research Reports
 
PWRSH-DYN RETL (PMR): ETF Research Reports
 
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