By John Wasik
CHICAGO May 3 With consumer stocks blazing this
year, it makes sense for investors to focus on retailers as the
U.S. economy continues an inchworm-like recovery. But retail is
a fickle business. And trying to guess which companies will
survive over the long-term is a dangerous game.
Instead of buying individual stocks, you'd be better off
owning an exchange-traded fund of retailers benefiting from a
revival of consumer spending, employment, home wealth and
economic growth. Two of the top three sectors in the economy
have been consumer discretionary products and staples, which
include the stock of both manufacturers and retailers. The
sectors have gained 14 percent and 17 percent year to date,
respectively, through May 1, according to Standard & Poor's. The
other top sector was healthcare.
There are four exchange-traded funds that focus on the
retail group. I like two of them, for different reasons.
One of the best-performing retail ETFs has been the SPDR S&P
Retail ETF, which has consistently beaten the Standard
and Poor's 500-stock index and its benchmark index of consumer
cyclical stocks over the past three years. The fund is up almost
20 percent for the three years through May 1 and is up 13
percent year-to-date, beating the consumer cyclical index by
almost four percentage points.
As an index fund focusing on all the major retailers, the
SPDR fund will capture the performance of major players like
Wal-Mart Store Inc, Target Corp and Amazon.com
Inc without being dominated by them. Its two largest
holdings were drugstore chain Rite Aid Corp and
wholesale distributor SuperValu Inc as of May 1.
No one stock accounted for more than 1.6 percent of the
total portfolio. With 98 stocks in its portfolio, the SPDR fund
is virtually equally weighted and not overexposed to big swings
in troubled giants like Wal-Mart, JC Penney Company Inc
and Sears Holdings Corp.
A worthy alternative is the relatively new Market Vectors
Retail ETF, which holds big players like Wal-Mart, Home
Depot Inc and Amazon as well as up-and-comers like TJX
The fund was up almost 20 percent last year and 12 percent
year-to-date. Its managers take a different approach from the
SPDR fund: They focus on segment leaders like Home Depot and CVS
Caremark Corp but deploy nearly half the fund's assets
in "consumer defensive" stocks that might hold up better during
These funds appear to be well-positioned to respond to the
long-term changes in the industry. Although companies like
Amazon continue to dominate online sales, these fund managers
won't count out brick-and-mortar stores, especially those
A growing shift favors smaller, more specialized stores such
as Ross Stores Inc and T.J.Maxx, which provide deep
discounts on name-brand items. Consumers who may have preferred
shopping at aging retailers JC Penney and Sears/K-Mart "are
either trading up to stores like Macy's or trading down to
T.J.Maxx or Ross for brand names at significant discounts," says
Jason Asaeda, a retail analyst at Standard and Poor's. The funds
I've picked own stocks like TJX and Ross.
Retail innovators are paying attention to changing
demographics and long-term changes in Americans' purchasing
habits. Successful chains will adapt, while losers like
electronics retailer Circuit City, which went bust in 2009, will
Online retailers such as Amazon.com continue to poach sales
from brick-and-mortar specialty stores such as Office Max Inc
and Office Depot Inc, which have proposed a
merger to compete with office giant Staples Inc.
Consumers have increasingly gone to the physical stores to
inspect merchandise and "showroom" prices, then shopped online
to get better deals. Stores without a robust online presence and
"rapid retail" mode of delivery won't survive.
Best Buy Co Inc, for example, hopes to regain market
share by opening some 800 Mobile stores, which focus on portable
electronics, while closing up to 200 existing locations. It
remains to be seen whether Congress can level the playing field
by allowing states to collect retail sales taxes from online
You need to be vigilant about retailers despite the healthy
returns this year. These stocks are acutely sensitive to overall
economic activity in the United States, given how closely linked
they are to consumer confidence.
With doubts surfacing recently over the economy's resilience
- retail sales dropped a seasonally adjusted 0.4 percent in
March - consumer spending, which accounts for 70 percent of the
U.S. economy, could get wobbly fast. If a new slowdown were to
come, it would rapidly blister most retailers.