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Is This a Bull Market for Retail ETFs?

Zacks Equity Research

As equities continue to soar, the benchmark large cap index of the U.S. equity market, the S&P 500, inches closer to its all time high level. This has largely been thanks to strong employment figures, little geopolitical worries, and solid domestic data (read ETFs in Focus This Week: VXX and XRT).

In particular, the retail sector has been in focus due to recent monthly data. While some were expecting weakness in the latest report due to higher taxes and the sequester, it didn’t come to pass in the last release.

In fact, total sales (inclusive of auto sales) reported a 1.1% increase compared to a rather subdued expectation of +0.5%. This continues a solid trend for retail over the past few months, suggesting to many that the consumer is back on track.

This news also helped to push retail ETFs higher once more, keeping a solid winning streak alive for these sector funds.  

In particular, investors saw a good day out of the SPDR S&P Retail ETF (XRT) which tracks the companies in the retailing business from the S&P 500, as this fund moved up 1.33%. Beyond this ultra-popular fund, we also saw good days out of the PowerShares Dynamic Retail ETF (PMR), which was up by 1.22%, and the Market Vectors Retail ETF (RTH), which added 0.85%.

Even without including yesterday’s trading, retail ETFs have been having a pretty good run thus far, primarily fuelled by rising consumer confidence and spending, following the holiday season last year. However, it is true that worries over the fiscal cliff and a payroll tax hike did take a toll on these ETFs in the latter part of December last year (read Impact of Positive Jobs Data on ETFs).

On a one year look, XRT and PMR have returned around 15.5% and 9% respectively. However, their counterpart RTH seems to be comfortably beating them with a one year return of around 19.8%.

Also, investors should note that one characteristic which probably sets RTH apart from the other two ETFs is that it provides a pure play in the retail ETF space without any exposure in the auto space, something that investors should keep in mind if they are curious about diving into the space.

Friday: Another Important Day for the Retail ETFs?

Friday could well be yet another action packed day for the retail ETFs especially considering the fact that the Consumer Sentiment data is slated to be released on that day (read What's Next for Currency ETFs?).

While the Retail Sales data might have completely overshadowed the potentially toxic effects of gasoline price increase and the payroll tax hike on consumption, it will be interesting to see if these factors will weigh on consumer confidence.

If it does, it is quite possible that we could well see a pullback in these ETFs from current levels. However, if the consumer confidence is in alignment with the robust Retail Sales data we could well see another surge in the retail ETF prices on Friday, continuing their solid momentum.

XRT, PMR and RTH all have a Zacks ETF Rank of 2 or ‘Buy’ with ‘High’, ‘Medium’ and ‘Low’ risk outlooks, respectively (see the Zacks ETF Rank Guide).

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