This article was originally published on ETFTrends.com.
After a volatile December that saw U.S. equities finish their worst year in over a decade, the retail sector was banking on a strong holiday shopping season to shake its own market doldrums. With the ongoing government shutdown delaying retail figures from the Commerce Department, retail investors are left to wonder whether a market cap-weighted strategy or an equal weight strategy will serve them best moving forward.
ETF Trends Publisher Tom Lydon joined CNBC's Bob Pisani on the new "ETF Edge" show to discuss the dichotomy of these two strategies inherent in VanEck Vectors Retail ETF (RTH) and SPDR S&P Retail ETF (XRT) .
On one hand, RTH makes its case for a market-cap weighted strategy with its emphasis on concentrated holdings of 19 percent in Amazon, 11 percent in Home Depot and 10 percent in Walmart to round off its top three positions. Of course, with Amazon being one of the prime growth-fueled stocks during an extended bull run that saw it reach $1 trillion in market value, RTH was able to eke out a 3.63 percent return in 2018 despite the year-end volatility.
However, Lydon mentioned that the market-cap weighting strategy of RTH isn't a miracle elixir that cures all ills in a retail industry that got hit recently as a result of slower growth from the likes of Macy's and Kohl's.
"Market cap weighting doesn't always work in your advantage the way it did here," said Lydon.
With its heavy emphasis on Amazon, which experienced deep declines during a tumultuous December, RTH fell below its 200-day moving average.
"You live and die by the sword," said Lydon.
"In this case, it did very well on the upside the last five years, but because it was online-oriented, it got slammed in the recent decline," Lydon added.
On the other end of the spectrum, XRT provides an equal weighting of variety of retail stores as opposed to the concentrated holdings of RTH. With a 1.2 percent allocation to stores like Lithia, Foot Locker, Kohl's, Party City, and others.
In 2018, XRT lost 8 percent by losing out on RTH's Amazon holding. However, it gives investors diversification across the retail sector, but does it do so at the cost of performance?
Like RTH, XRT wasn't immune to December's declines.
"With a retail ETF that's more equal weight, it didn't have much of a move in the last five years and continues to dwindle, but that doesn't mean equal weighting or smart beta strategies aren't bad," said Lydon.
An Alternative Retail Option
Early indications of a strong holiday shopping season were already evident on Black Friday as online sales reached a record total of $6.22 billion according to Adobe Analytics. That was followed up with Cyber Monday when sales reached a record $7.9 billion, which represented a 19.3 percent increase from a year ago.
The sales increase obviously speaks to the shift of consumer spending habits from brick-and-mortar retail to the convenience of online shopping. Adobe Analytics also reported that half of the $6.22 billion in sales came from mobile devices like smartphones.
This constant year-over-year migration from brick-and-mortar to online was evident as visits to physical retail stores was down for a fifth straight year, according to a Wall Street Journal report. However, the drop in 2018 wasn’t a steep drop-off from 2017 as consumers still use physical stores to purchase items they know are in stock or want to view an item prior to purchasing it online for a better price. With this shift in consumer habits, investors can look to the ProShares Long Online/Short Stores ETF (CLIX) to capitalize. CLIX seeks investment results that track the performance of the ProShares Long Online/Short Stores Index, which consists of long positions in the online retailers included in the ProShares Online Retail Index and short positions in the "bricks and mortar" retailers included in the Solactive-ProShares Bricks and Mortar Retail Store Index.
"It's long online and short big box retailers," said Lydon.
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