Owning a Retail ETF Is like Investing in a Hundred Different Stores at Once


Retail ETFs

We’re pleased to present the sixth entry in The Twelve Stocks of Christmas, a focus on 12 holiday-related securities that you can invest in right now. While these stocks are available to purchase year-round by anyone, they’re currently receiving more attention due to their products’ popularity during the holiday season.

The holidays are almost here, which means it’s a good time to be a retailer. Right now, every store is experiencing an uptick in foot traffic (and hopefully revenue) as shoppers around the country flock to retailers for their last-minute gifts.

Investors, however, bought their holiday presents long ago in the form of stock, with some financially savvy individuals choosing to invest money into the retailers themselves. They did this hoping that an uptick in sales and the increased volume of purchases during the holidays will ultimately help a retailer’s earnings, which could then lead to an increase in share value.

Yet if you want to invest in retail stocks, which store do you start with? Sure, you could buy a few different retailer stocks and hope for the best. You could also buy stock in dozens of retailers in different sectors, but that would get expensive.

That’s why retail exchange-traded funds (or ETFs) exist. They let you buy stock in numerous companies for one low(ish) share price. Here’s how it works.

The S&P Retail Select Industry Index measures the strength of the major retail market.

It uses a weighted average of around 100 companies to give a general idea how the retail sector is doing at the moment. Instead of looking at the performance of all companies on the index, you just need to look at the index number. If retailers are doing well, the number goes up. If retailers perform poorly, the number goes down.

The XRT ETF lets you invest in these companies by paying a single share price.

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If you buy a single share of $XRT (going for $46.12 each as of this writing), you will buy into over 100 different retail stocks, including Kroger, Ross, and Whole Foods. Buying these stocks individually would be expensive, so buying this ETF lets you minimize the cost.

XRT’s movements are directly tied to the S&P Retail Select Industry Index.

If the index goes up, XRT goes up. If the index goes down, XRT goes down. If a company is removed or added from the index, then State Street (the managers of the fund) sell the old retailer and buy the new one.

XRT isn’t the only retail ETF you can buy.

iShares’ $IYC invests in the consumer services sector, while Van Eck’s $RTH follows a different index — the Market Vectors U.S. Listed Retail 25 index. There are numerous ETFs tracking and even betting against the sector, all which you can buy into right now.

Retail sales are different from how they were a decade ago.

XRT, a retail ETF
StockTwits

While retail sales were strong earlier this year, sales this past November barely increased from October and did not meet analyst expectations. They are, however, up from a year ago, and there are no accurate projections for the current month. At the same time, people are buying more things online and spending less in physical stores. Luckily, most retail ETFs follow stores with physical and digital storefronts.


Should you buy a retail ETF? The economy is stronger than it was a year ago, and consumer spending is up. If you think retailers will see some benefit from this, then you might want to research the industry some more before you invest any money into a retail ETF. If you don’t want to speculate on December’s retail numbers and are not as positive about the future of retail, you might be better off investing in something else.