The Market's Measure
Shopping The Retailers

Shopping The Retailers

After a months-long run, what’s the best upside play?

It’s been hard to find bright spots among domestic equity sectors lately. Oh, sure, there are utilities, but those have been horror shows on a year-to-date basis.  Utilities pay nice dividends but who needs that kind of volatility?

Better momentum’s found among retailers which have been uptrending since mid-October. Well, let me rephrase that. There’s an uptrend that started in October. Presently, the retailers are in a bit of a congestion area. The question to ask now is whether this consolidation pattern is just a pause in a continuing uptrend or a signal of a rollover to lower prices.

Fundamentally, the case for retailers is good.  The domestic economy is on a growth track, helped by lower oil prices and improvements in the job market. Consumer confidence and spending, generally, have been mounting apace. Retail sales make up nearly a third of all consumer spending which, in turn, represents two-thirds of the U.S. economy.

Search for ETFs tracking the sector and you’ll find three with “retail” actually in their names: the PowerShares Dynamic Retail ETF (NYSE Arca: PMR), the SPDR S&P Retail ETF (NYSE Arca: XRT) and the Market Vectors Retail ETF (NYSE Arca: RTH).

 

Click to Enlarge

 

PMR’s underlying index is comprised of 30 stocks led by the likes of Kroger Co. (NYSE: KR) and Dollar Tree, Inc. (Nasdaq: DLTR). Urban Outfitters, Inc. (Nasdaq: URBN) and Orbitz Worldwide Inc. (NYSE: OWW) top the 100-stock index tracked by XRT. The RTH portfolio, just 26 stocks wide, gives greatest weight to Wal-Mart Stores, Inc. (NYSE: WMT) and Home Depot Inc. (NYSE: HD)

If you love large-cap retailers, RTH is your man. Fans of mid-cap outfits like XRT. PMR is a bit of mixed bag, but leans toward the smaller retailers. Therein, perhaps, lies the road map to the retail future.

PMR has the weakest correlation to the broad-based S&P 500; RTH has the greatest. PMR’s index methodology selects components on a variety of criteria including momentum and value metrics, not capitalization.

 

One-Year Performance vs SPY

 

 

PMR RTH XTR
Sharpe Ratio 1.24 2.06 1.02
R-Squared 41.55 66.52 45.98
Beta 71.19 86.21 89.44
Alpha 12.11 21.11 9.33

 

 

 

 

 

 

If you don’t want your retail play to be tethered to the prospects of the S&P 500, PMR may be your best technical bet now.  

 

 

Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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