Why Retail ETFs Could Continue to Outperform

ETF Trends

The outlook for retail giants is looking positive based on various fundamentals, according to S&P Capital IQ. Three select exchange traded funds that track a handful of mega-retailers have an “Overweight” ranking from the ratings company.

“We see (certain) factors positioning hypermarkets and super centers to gain market share given their price advantage compared to more traditional retail formats. Also, because they largely sell such everyday consumer staples as food and beverages, this should make their sales less sensitive to changing fashions and demand for other discretionary goods than those of some other retailers,” S&P Capital wrote in a recent note.

Super centers such as Wal-Mart (WMT) and Costco (COST) will benefit from modest upticks in sales and improved operating efficiencies. Most club-style stores are benefitting from small business customers and higher-income consumers. Fundamentals supporting the growth of mega-retailers include market share growth opportunities, lower investor expectations and defensive characteristics. [Consumer Staples ETFs Losing Defensive Allure]

Mass merchandise retailers have underperformed the broad market by 6 and 1 percentage points, leaving them positioned for outperformance later this year.

Exchange traded funds such as Vanguard Consumer Staples (VDC) , Consumer Staples Select Sector SPDR (XLP) and the Market Vectors Retailers (RTH) are rated “Overweight” by S&P Capital. This rating is based on a combination of performance, risk and cost metrics. [Retail ETFs Tick Up on Higher Sales]

The positive trend in mass market retailers is just beginning, as both Target and Wal-Mart management lowered current year outlooks for sales and earnings. This move was based on lackluster second quarter earnings reports. However, going forward, this will give more opportunity for upside potential instead of downside risk, should economic growth continue to improve. [Retail ETFs May Ring Up Gains on Sales]

Other consumer-focused ETFs:

  • iShares US Consumer Services ETF (IYC)
  • PowerShares Retail Fund (PMR)
  • Guggenheim S&P Equal Weight Consumer Discretionary (RCD)

Tisha Guerrero contributed to this article.

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.

View Comments