While some investors are growing concerned over the market in the near term, there are definitely still some pockets of growth out there. In particular, investors may want to bank on the retail segment as we approach summer.
This particular corner of the market has been riding strong trends that have left it in an enviable position to open up May. Solid data on the consumer spending front—which showed an increase of 3.5% year-over-year—and a high level of consumer sentiment both suggest that spending will not be slowing down anytime soon.
If this trend continues, it could be great news for extremely discretionary sectors, and particularly retail. Fortunately for those who do not want to make a concentrated bet on any one company in the space, there are a number of retail ETFs currently on the market (see Is This a Bull Market for Retail ETFs?).
However, it could be difficult for some to choose between the group, as there are a number of key factors lurking below the surface in this segment’s ETFs. One way to narrow down the group is by using the Zacks ETF Ranking system as a way to pick.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more on the Zacks ETF Rank).
Top Low Risk Choice
By using this methodology, we find that a few retail ETFs receive top Zacks ETF Ranks of 1 or ‘Strong Buy’. However, there is just one that receives a top rank and a ‘low’ risk rating, a potentially potent combination in today’s uncertain economic climate.
That is because many investors remain uncertain about the near-term trend in the market, and how best to play these trends going forward. A low risk retail ETF could be a nice compromise between a low volatility play and the strong retail trends, and thus a potentially great choice for investors.
Top Ranked ETF in Focus: RTH
The one ETF that fits this bill is the Market Vectors Retail ETF (RTH) from Van Eck. The fund charges a somewhat low expense ratio of 35 basis points a year, and sees average volume of just over 100,000 shares a day.
It is also worth noting that the fund is heavily exposed to large cap stocks, as these make up the bulk of the 26 stock fund. In particular, the top three holdings are Wal-Mart, Home Depot, and Amazon.com, and these combine to take up more than 27% of assets (also read Access the $30 Trillion Consumer Market with These ETFs).
From a sector look, specialty retail takes the top spot (33%), followed by big box stores and department stores, which combine to take up another 30% of assets. Beyond that, a number of other segments such as drug stores, health care services, and internet retail help to round out the rest of the portfolio and prevent a heavy industry concentration.
RTH has been a pretty solid choice from a performance perspective, beating out the S&P 500 over the trailing six month period by a few basis points. This trend is even more pronounced when looking at longer time frames, suggesting that retail and RTH in particular could continue to be a great choice.
There are some strong trends that are supporting the retail sector and that suggest that the space could be a good pick going forward. However, the market remains a bit shaky so lower risk choices could be the way to go for now.
Fortunately, investors can look to the retail segment and a Top Ranked, low risk, pick for exposure during this time; RTH. The fund offers up great exposure to the space, and looks to be less volatile thanks to its large cap focus, meaning that it could be an interesting selection for retail ETF investors in the near term.
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