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 the basics of investing in this product. Also, find out what to look for when choosing between retail ETFs.
What Are Retail ETFs?
Retail industry ETFs invest in stocks of companies within the retail industry. Examples of retail businesses include apparel stores, automotive retailers, home improvement outlets, computer and electronics stores, department stores, drug retailers, food retailers, e-commerce retailers, and specialty stores. Some of the largest retail stocks include Amazon (AMZN), Home Depot (HD), and Walmart (WMT).
Many brick-and-mortar retail stores are suffering closures and setbacks nationwide. But most retail ETFs also contain shares of online retailers. Retail ETF investors may still be negatively affected by brick-and-mortar closures, but they may also benefit 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. In this case, it's a retail index like the S&P Retail Select Industry Index. With an index in mind, the fund manager will allocate investor assets; hopefully, this will be done in a way that replicates the performance of the underlying index. By buying shares in the ETF, investors can track the index without having to individually buy every stock listed on the index.
Investors choosing between retail ETFs should consider the major factors that impact all ETFs, such as assets under management (AUM) and expense ratios. There are also some qualities to think about when it comes to retail ETFs before selecting the best fund for you.
Consider these points when choosing the best retail ETF for your needs:
- AUM: ETFs with higher AUM are preferred over ETFs with lower AUM. This is because, in most cases, more assets provide greater liquidity. In turn, this usually means a lower bid/ask spread and less price volatility.
- Expense ratio: All other things being equal, two retail ETFs that track the same index should perform pretty much 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? Or, 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 compared to 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. But reviewing past annualized returns can give you an idea of what to expect in the future with retail stocks.
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 July 2, 2021.
- SPDR S&P Retail ETF (XRT): With about $971.96 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 $1.33 billion AUM.
- VanEck Vectors Retail ETF (RTH): RTH has $257.9 million in assets and is relatively concentrated. It holds 100 stocks, most of which are large retailers like Amazon, Home Depot, Target, and Walmart. The expense ratio for RTH is 0.47%.
- ProShares Online Retail ETF (ONLN): This is another retail ETF that concentrates on online retailers. AUM is $165.52 million and the expense ratio for the fund is 0.58%.
- 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.