Retail ETFs not only include a range of companies in the sector but crossover into consumer staples such as groceries and household goods, which are considered better bets in an economic downturn.Fred Lum/the Globe and Mail
Skyrocketing inflation, rising interest rates and recession worries have whipsawed the already volatile retail sector in recent weeks. Investors are now trying to gauge what consumers will do heading into the back-to-school and holiday shopping seasons.
Big-name retailers such as Walmart Inc., Nordstrom Inc. and Macy’s Inc. have issued profit warnings recently, signalling a pullback in consumer spending. Still, some investors believe there’s money to be made in retail longer-term, especially after the recent market drop, including through more diversified retail exchange-traded funds (ETFs).
Retail ETFs not only include a range of companies in the sector but crossover into consumer staples such as groceries and household goods, which are considered better bets in an economic downturn.
Here are six North American ETFs to consider for investors willing to ride the retail wave:
SPDR S&P Retail ETF (XRT-A)
Assets under management (AUM): US$305-million
Year to date (YTD) performance: down 24 per cent
Management expense ratio (MER): 0.35 per cent (All data from Morningstar as of Aug. 25 close)
The largest ETF in the sector, XRT is equal-weighted and tracks the performance of retail stocks on the S&P Total Market Index. It offers broad diversification to about 100 large, mid- and small-cap retailers in the U.S. Some of its top holdings include Walmart, Etsy Inc., Costco Wholesale Corp., Amazon.com and Carvana Co.
“It’s a well-balanced ETF in that you get exposure to online, but you also get more traditional retail, large and small,” says Grant White, portfolio manager with Endeavour Wealth Management at iA Private Wealth in Winnipeg.
The ETF has a high exposure to consumer cyclical companies, also known as consumer discretionary companies, which are more exposed to fluctuations in spending that comes with rising inflation and interest rates, explains Bryan Armour, director of passive strategies research at Morningstar in Chicago.
“As everything becomes more expensive, discretionary retail is where you see consumers making decisions to pull back on their spending,” he says.
VanEck Retail ETF (RTH-Q)
AUM: US$170-million
YTD performance: down 10 per cent
MER: 0.35 per cent
RTH offers more concentrated exposure to the retail sector with 25 stock holdings tracking the performance of the MVIS US Listed Retail 25 Index.
“It’s highly concentrated in megastore retailers,” Mr. White says, noting that nearly half of its assets are held in four stocks: Amazon.com, The Home Depot Inc., Costco and Walmart.
The ETF is likely a better choice than equal-weight ETFs like XRT if large retailers outperform smaller, more discretionary consumer retailers, which often happens during challenging economic times, Mr. Armour says.
An example is during the pandemic when many small retailers went bankrupt, effectively increasing market share for larger players with strong balance sheets that enabled them to persevere during the sector downturn.
The drawback with RTH is also its concentration in a few large-cap because “you largely lose the benefits of diversification across the sector,” Mr. Armour says.
Amplify Online Retail ETF (IBUY-A)
AUM: US$240-million
YTD performance: down 44 per cent
MER: 0.65 per cent
IBUY is an equal-weighted, highly diversified ETF that offers investors exposure to global e-commerce retailers. The ETF, which tracks the EQM Online Retail Index, holds 74 companies, including online pet food and product retailer Chewy Inc., Netflix Inc., eBay Inc., Etsy Inc., Alibaba Group Holdings and Expedia Group Inc.
“This ETF has been enormously volatile because through the pandemic there were a lot of assets pouring into all the underlying stocks,” says Daniel Straus, director of ETFs and financial products research at National Bank of Canada Financial Markets in Toronto.
Investor capital has since flowed back out with the return to in-person shopping, he says, leading to negative performance so far this year. Tech stocks have also been hard hit in the recent market rout.
Still, the ETF could provide growth longer term, Mr. Straus says, given e-commerce’s increasing share of the retail landscape. Just don’t expect the 124-per-cent return it saw in 2020 amid unprecedented pandemic demand for e-commerce, he adds.
ProShares Decline of the Retail Store ETF (EMTY-A)
AUM: US$17.5-million
YTD performance: up 2 per cent
MER: 0.65 per cent
The ProShares fund allows investors to bet against the performance of traditional retailers, seeking to provide the inverse of the daily return of the Solactive-ProShares Bricks and Mortar Retail Index.
“Even prior to the pandemic, there had long been talk about how brick and mortar was dead,” Mr. Straus says.
By shorting the index, the ETF uses leverage, which adds more risk to an already volatile sector.
“Leveraged ETFs are not buy-and-hold investments,” he says. “They’re highly speculative and meant to be held for very short spans.”
iShares S&P TSX Capped Consumer Staples ETF (XST-T)
AUM: $173-million
YTD performance: up 5 per cent
MER: 0.5 per cent
While there’s no ETF focused on Canada’s retail sector, XST comes pretty close, notes Mr. Straus, with a focus on the grocery side of the sector.
Some top holdings in the Toronto Stock Exchange-listed ETF include Alimentation Couche-Tard Inc., Loblaws Companies Ltd Metro Inc. and George Weston Ltd.
As a consumer staple fund, XST is likely to hold up better than pure-play retail ETFs, which have more exposure to consumer discretionary in an environment where budgets are constrained, Mr. Straus says.
BMO Global Consumer Discretionary hedged to Canadian dollars ETF (DISC-T)
AUM: $35-million
YTD performance: down 18 per cent
MER: 0.4 per cent
DISC is another ETF with a Canadian flavour listed on the TSX.
“The concentrated nature of Canada’s retail landscape is one reason why investors who are looking for this theme probably need to think globally,” Mr. Straus says, noting about 16 per cent of DISC is tilted to retail.
Five of its 330-plus holdings are Canadian stocks, including retailers Canadian Tire Corporation Ltd. and Dollarama Inc.
As a consumer discretionary fund, much like pure-play retail ETFs, DISC is likely more negatively affected by inflation than the staples-focused XST, as demonstrated in recent months.
“We’ve sort of gone from a high-spending economy favouring cyclicals coming out of the pandemic to one today where consumers are much more price conscious,” adds Mr. Armour.