XRT: Underlying Conditions Look Healthy, But Don't Get Too Complacent

seekingalpha11-22

The SPDR S&P Retail ETF offers specialized exposure to the retail component of the total stock market, covering 79 stocks across various retail sub-sectors.Despite healthy retail sales and improving ...

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One can understand the seasonal buildup ahead of the holiday seas","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"XRT":"零售指数ETF-SPDR标普"},"translate_title":"XRT：潜在状况看起来健康，但不要太自满","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XRT":0.9},"content_text":"The SPDR S&P Retail ETF offers specialized exposure to the retail component of the total stock market, covering 79 stocks across various retail sub-sectors.Despite healthy retail sales and improving consumer sentiment, risks such as a higher threshold of inventories, steep listing prices, and potential tariffs could impact future performance.XRT's valuation appears attractive relative to the broader market, but its yield is sub-par, and the risk-reward on the charts does not look ideal.FG Trade Latin/E+ via Getty Images  Introduction At over $400m of AUM, the SPDR S&P Retail ETF (NYSEARCA:XRT) is the largest ETF in the market that provides specialized exposure to the retail sector of the US markets. XRT, which has been around for close to two decades, currently focuses on 79 stocks that are involved in various retail sub-terrains including automobiles, specialty, broadline, food, drug, electronics, and even some consumer staple merchandisers. YCharts On a YTD basis, XRT has not dazzled, but has generated steady returns of 8%; however, it isn't a patch on the returns generated by the benchmark index which has ended up delivering over 3x the returns. Looking ahead, we are not convinced there will be a massive shift in this narrative as we feel the retail sector is staring at rather mixed conditions. Besides, we've previously also expressed concerns over whether XRT is the best vehicle to play the retail game. Healthy Retail Conditions For Now, But Don't Dismiss Potential Risks As things stand, various metrics point to a rather healthy retail landscape, but that may change over time. If we may start with the good, firstly note that retail sales continue to surprise to the upside. The October report which was only expected to showcase a 0.3% m-o-m increase, ended up beating expectations and coming in 0.4% higher. Encouragingly, the previous month's estimates were also revised upwards to 0.8%. Trading Economics Special attention ought to go toward the automobile retailers as they account for the largest chunk of XRT's holdings. Note that in October, auto sales volumes were only expected to grow by 11% YoY, but it overshot expectations and ended up coming in 13% higher. Besides taking heart from the official retail sales numbers, retailers, in general, are likely also feeling more emboldened as consumer sentiment appears to be on the up. After a tepid July, the US Michigan Consumer sentiment index has been trending up for 4 straight months now. Also note that the most recent reading of 73 was 2 points ahead of what the street was expecting. Within the report, one also gets access to an expectations index which is more of a forward-looking gauge, and it's worth noting that this sub-index ended up hitting its highest level since July 2021! Trading Economics All this is very well, but we feel there's the risk that these retailers may be over-indexing the purchasing appetite of US consumers. One can understand the seasonal buildup ahead of the holiday season, but it has been a bit troubling to note that retail inventories are currently at \"very excessive\" levels compared to the long-term trend (a 2% variance vs the norm). Some of this upfront purchasing ahead of the holiday season may be explained by retailers preparing in advance for potential tariff risks following a Trump win (more on this later). In the auto sector for instance, the position of available unsold inventory has crossed the 3 million mark and is currently growing at a pace of 30% on an annual basis. Auto retailers now have more than enough elbow room with close to 3 months of supply. Cox Auto However, there's the risk of taking things for granted, as listing prices of vehicles continue to trend up; average prices have been above the $47000 mark for two years now, and more recently hit $48,117, which translated to a 0.7% monthly increase, and a 1.8% annual increase. Auto loan rates continue to hover at the double-digit percentage mark, and the US Fed's desire to take it slow with rate cuts, certainly won't be music to the ears of those waiting to own new vehicles. This would then likely prompt a spike in promotions and discounts, to keep up volume growth, which certainly won't reflect well on gross margins. Third Way An underrated risk for retail spending momentum could also come from the Trump administration's plan to impose a 10% tariff on all imports and 60% tariffs on Chinese products which will almost certainly stoke inflation, crush household budgets, and diminish the appetite for discretionary spending. For instance, consider big-box store products which are heavily dependent on Chinese imports; an analysis by Third Way shows that if Trump's tariff plans go into effect, they could end up spiking costs by 15%. If investors need any reminding, consider Trump's 2018 tariffs which ended up raising the prices of key consumer durables by a double-digit percentage threshold. Closing Thoughts Meanwhile, the valuation, income, and technical sub-plots point to a mixed positioning on XRT. XRT represents the retail segment of the S&P total market index which covers stocks across the market-cap spectrum. The ETF which tracks this index is the iShares Core S&P Total U.S. Stock Market ETF (ITOT). If we measure how XRT is positioned relative to the broader market (i.e., ITOT), things look rather alluring from a mean-reversion angle, as the current relative strength ratio is around 23% lower than its long-term average. YCharts Conversely, the glass half-empty brethren may argue that this ratio is still not quite at its pandemic lows and remains vulnerable to further correction. To counter that, we would point to XRT's favorable valuation quotient, where it is priced at a forward P/E of just 13.3x, whereas ITOT is priced at a 55% premium at over 20x. YCharts Then, yield-chasing investors will also be disappointed to note that at current price levels, XRT's yield of 1.23% comes across as sub-par as it is around 36bps lower than what the ETF has typically yielded over the past 5 years. Finally, if we switch over to XRT's weekly chart, we have to admit that we're not very enthused with the current risk-reward on offer. Investing Taking a broader perspective XRT appears to be forming something akin to a bull flag pattern with a strong uptrend from October 2023 to March 2024, followed by a long wave of consolidation, before a potential breakout from here.  XRT may well break out from here, but we've seen previously (in 2-22) that when it gets closer to the $80 levels we see a lot of candles with higher upper wicks, suggesting an increase in supply. This year there have been multiple instances where XRT has tried to break out from the $70-$80 trading range (highlighted in red) but come up short. Given this backdrop, we think it would be more prudent to deploy funds at the lower end of this range, rather than gamble when the ETF price is so close to a level that has previously served as resistance.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485957257"}