The retail ETF betting on a robust holiday season

Investors have been on a shopping spree since April, lifting the SPDR S&P Retail ETF [XRT] gains to new highs. Steadily improving consumer confidence has pushed the fund’s year-to-date total daily return to 19.5% and as of 26 October, it had net assets of $275.49m. How will the ETF perform as it heads towards retail’s historically busy quarter.

The XRT ETF opened the year at $46.54 on 2 January before slumping to a low of $26.86 on 23 March, as fears over the coronavirus’s impact on the economy and society sent markets plunging.

It wasn’t just the markets that collapsed, however. US retail sales fell by 8.2% in March and 14.7% in April, according to Trading Economics. The rebound was swift though, with sales surging to 18.3% in May and a further 8.6% in June.

This growing demand helped the ETF push higher, which surged to an intraday high of $55.26 on 16 October. As of 23 October, the fund was up 19.6% at $54.44.

Gaining exposure to the surging retail sector

State Street Global Advisors first launched the SPDR S&P Retail ETF on 19 June 2006 with the aim of providing exposure to the retail segment of the S&P TMI, which comprises sub-industries such as clothing, automotive retail, department stores and e-commerce. As of 22 October, it has 85 holdings.

Videogame retailer GameStop Corporation [GME] is the fund’s largest holding and constitutes 2.84% of the fund, followed by online advertiser Magnite [MGNI] at 1.96%. Other key holdings include automotive dealership Group 1 Automotive [GPI] weighted at 1.66%, diamond jeweller Signet Jewelers [SIG] at 1.61%, auto parts maker CarParts.com [PRTS] at 1.57% and online stylist Stitch Fix [SFIX] at 1.5%.

GameStop’s share price has rocketed 435.7% for a low 3 April to a high of $15 as 23 October. This was driven by demand for videogames during lockdown. The company reported an 800% hike in global e-commerce sales in the second quarter, although overall sales fell 26.7% year-over-year to $942m as stores were closed.

Magnite’s share price, meanwhile, has performed similarly. It recovered climbed 100% from a low of $4.89 on 16 March back to $9.81 as of 23 October — above its opening price at the start of the year. Shares in the advertising technology company have been riding trends in connected TV, despite it posting a loss of $39m in second quarter.

The remaining three top holdings in the fund have also had positive performances so far this year. Group 1 Automotive’s share price climbed 22.6% for the year through 23 October, while Signet Jewelers, CarParts.com and Stitch Fix climbed 23.8%, 504.9% and 38.1%, respectively, in the same period.

The retail sector’s bumpy outlook

The XRT ETF has benefited from having diverse holdings across industries that have flourished amongst changing consumer needs and trends. It currently has a Zacks consensus buy rating with a medium risk outlook.

The slightly cautious risk stance is down to uncertainty over consumer confidence in the crucial holidays spending season.

The National Retail Federation forecasts the period to be full of “wildcard puzzle pieces” such as policy surprises, the US election and a resurgent virus. The trade association expects there to be a shift to more tactical and practical online shopping.

Deloitte predicts a 7% drop in average holiday spend per US household but with 73% planning to have items delivered, it will continue to benefit e-commerce stocks.

Another boost to retail spending could come in the way of government stimulus, wrote Sanghamitra Saha, an analyst at Zacks.

“Another round of stimulus [cheques] means a rally in retail stocks,” she said. “There is a decent outlook ahead for those who want to ride this surging ETF a shade further.”

There are some clouds on the horizon, however. Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, has warned that a Joe Biden presidency could mean higher taxes on consumer staples and retail.

The potential for deepening economic recession and rising unemployment could also spell trouble for retail. But the SPDR S&P Retail ETF should, once again, check out well given its balance of e-commerce and in-vogue retail stocks.