What Are Retail ETFs?

Customers making a purchase at a retail store
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DEFINITION

Retail exchange-traded funds (ETFs) are investment products that are designed to give investors broad exposure to the overall retail industry rather than investing in a single retail company. If a trader has an idea about the direction they think the retail industry is going, they may be able to use a retail ETF to capitalize on that sentiment.

Retail exchange-traded funds (ETFs) are a type of investment product. They are designed to provide broad exposure to the overall retail industry rather than a single retail company. If a trader has an idea about the direction they think the retail industry is going, they may be able to use a retail ETF to capitalize on that sentiment.

Learn about retail ETFs and what to look for when choosing among them.

Definition and Example of Retail ETFs

Retail exchange-traded funds (ETFs) are companies—generally brokers or institutions—that buy stocks from retail companies and create funds that trade on an exchange. These companies then securitize these stocks and offer portions of them to investors. The largest retail stocks include Amazon (AMZN), Home Depot (HD), and Walmart (WMT).

One popular retail ETF is the VanEck Retail ETF (RTH), which seeks to track the MVIS U.S. Listed Retail 25 Index. The fund includes stocks from the 25 most liquid publicly traded companies in the U.S. Companies held by the fund include retail distributors, wholesalers, online merchants, direct mail and TV retailers, specialty retailers, and food and staple retailers.

Note

Many brick-and-mortar retail stores are suffering closures and setbacks nationwide. but most retail ETFs also contain shares of online retailers. As a result, retail ETF investors may still be negatively affected by brick-and-mortar closures while benefiting from the rise of e-commerce.

How Do Retail ETFs Work?

Retail ETFs are structured just like any other ETF. First, the fund manager picks an index to track. With an index in mind, the fund manager will purchase stocks using investor funds, hopefully in a way that replicates the performance of the underlying index. By purchasing ETF shares, you track the index without buying every stock listed on it individually.

Note

Retail ETFs enjoy all the benefits of ETFs. These benefits include diversification, potential savings on commissions and fees, and certain tax advantages over mutual funds.

When choosing among retail ETFs, you should consider the major factors that impact them, such as assets under management (AUM) and expense ratios.

Consider these points when choosing the best retail ETF for your needs:

  • Assets under management
  • Expense ratios
  • Holdings
  • Industry focus
  • Performance

Assets Under Management

ETFs with higher AUM may be preferable to ETFs with lower AUM, because in most cases more assets provide greater liquidity. In turn, that usually means a lower bid/ask spread and less price volatility.

Expense Ratios

All other things being equal, two retail ETFs that track the same index should perform about the same. This is true as long as they're passively managed. Therefore, the fund with the lowest expense ratio may ultimately make you more money, especially as the savings from a lower expense ratio compound over the long term. But what if the two funds you are comparing invest in different indexes? What if they are actively managed? In those cases, you'll have to compare the expense ratios to the holdings and performance.

Holdings

"Holdings" are what ETFs call the stocks they contain. You may be interested in a specific stock, but you also want exposure to the entire retail industry. You can look at an ETF's holdings to ensure it has what you're looking for. ETFs with a greater number of holdings can also provide more diversification and less volatility than more narrowly focused funds.

Industry Focus

Some retail ETFs invest broadly in all retail companies; others focus on specific subsections of the retail industry. It's important to understand the specific focus of an ETF before investing.

Performance

Past performance is no guarantee of future results. Reviewing past annualized returns can give you an idea of what to expect in the future under specific market conditions if you measure performance against what was influencing the market at that time.

Tip

You can use an online ETF screener to learn more about an ETF and compare it to others before you invest.

Retail ETF Examples

As with most industries, there are many ETFs you can choose from to track the retail sector. Here are four ETF options you can consider, but make sure to do your own research and ensure that they fit within your overall investment strategy before you buy any of these products. The information here is current as of June 17, 2022.

  • SPDR S&P Retail ETF (XRT): With about $323 million in assets under management, XRT offers exposure to many sub-industries within the retail industry, including apparel, drug retailers, department stores, and computer and electronics retailers. The expense ratio for XRT is 0.35%.
  • Amplify Online Retail ETF (IBUY): IBUY is a large retail ETF that includes companies from around the world that generate at least 70% of their revenue through online sales. The expense ratio is 0.65%, and it has roughly $897 million AUM.
  • VanEck Retail ETF (RTH): RTH has $148 million in assets and is relatively concentrated. It holds 25 stocks, most of which are large retailers like Amazon, Home Depot, Target, and Walmart. The expense ratio for RTH is 0.35%.
  • ProShares Online Retail ETF (ONLN): This is another retail ETF that concentrates on online retailers. AUM is $488 million, and the expense ratio for the fund is 0.58%.

What It Means for Individual Investors

Retail ETFs are another way for individual investors to access the stocks of companies operating in the retail industry. Because there are thousands of companies to choose from, it takes a significant amount of time to evaluate which stocks you'd want to buy.

While you could purchase the stocks, it is much more expensive, and you'll need to maintain the portfolio yourself. Exchange-traded funds are passively managed and have relatively low fees compared to mutual funds. Retail ETFs are an excellent choice for getting started if you're looking for a way to gain cost-effective exposure and diversity from multiple retail companies.

Key Takeaways

  • Retail ETFs are exchange-traded funds that track the retail sector.
  • For those that have a particular sentiment about the retail industry, retail ETFs are an easy and effective way of attempting to capitalize on that idea.
  • Retail ETFs can focus on both brick-and-mortar retailers as well as online retailers, though some retail ETFs may focus only on one or the other.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.

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