RETL: Leveraged Retail Plays Not Paying Off

seekingalpha11-25

Direxion Daily Retail Bull 3X Shares ETF offers 300% daily leverage on the S&P Retail Select Industry Index, making it highly risky.RETL is suitable for short-term traders with high-risk tolerance due...

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This fund offers exposure to the S&P Retail Select Industry Index, with an objective to deliver \"a return that is 300% the return of its benchmark index for a single day\". In practice, this means the fund uses extensive leverage, so it is designed for traders with either a short-term objective, plenty of risk tolerance, or both. I regularly cover the retail sector and I will often write about RETL as a fund that is very risky and therefore not necessarily appropriate for most retail investors. This is because 3X leveraged funds often need a sustained momentum swing in order to be profitable (unless one is able to time it very successfully in the short-term). This has often not been the case for the retail sector - as evidenced by RETL's weak return since my last article on the fund. Back in 2022, I was cautious on this ETF, and that caution was vindicated:   Fund Performance (Seeking Alpha)Of course, 2024 has been a good year for equities and the retail sector has been rising along with the rest of the market. This has included RETL and this short-term performance had me thinking I should take another look at this ETF to see if I should change my rating. After review, I simply see too much risk inherent in this idea to recommend it. I will therefore be keeping the \"hold\" rating in place and will use this review to explain why. Savings Rate Is Going Up - Signals More Cautious Consumers The first reason for my caution is an attribute that some readers may find as a positive. This is the US savings rate, which has recently normalized in a sign that the economy is on stronger footing. In fact, the household savings rate in the US has registered above expectations, which is likely the result of inflation finally beginning to cool: Household Savings Rate (US) (Federal Reserve)What I take away from this is indeed a bit mixed. On the one hand, it shows that US households will be in a sustainable financial position in the months ahead because they have been building up their savings for the time being. But the contrast to this is that it shows a more cautious consumer. Americans are now saving what could be spent and while that may wind up giving the economy a boost further down the line, in the immediate term it limits my outlook because discretionary spending is lower than its true potential. This isn't an outright bear case for retail, but it does give me a serious concern that makes me question why someone would want to go ultra-long on a retail play through RETL at this moment. The underlying economy is holding up well, but the consumer clearly has concerns. That is not an environment where I want to a strong bull - and that is what one should be if they want to buy RETL at these levels. \"Quits\" Rate Also Shows Caution There is another reason I am reluctant to upgrade my rating on RETL that is related to the state of the US household. This is the US quits rate - which is on the decline - and is impacting my outlook for consumer spending in the immediate term. This is another mixed metric, but let's start first with what it means. This rate measures how many employees voluntarily leave their jobs each year. There can be a host of reasons for this, but one takeaway from this metric is that a drop in voluntary departures can signal a lack of confidence (among workers) that they will be able to find better employment prospects. As the graphic shows, this metric has declined steadily over the last couple of years and that is corresponding with a labor market that is absolutely tightening: US \"Quits\" Rate (US Department of Labor)The leads to the question - what is the relevance to the retail sector? In my view, this is another metric that signals some underlying cautiousness out there in American households, and that means they are likely to pull back on spending a bit in the months to come. The reason I say this is because when employees are not quitting and finding better employment prospects on the open market, it means they are at least somewhat concerned that if they quit now, they will have trouble finding a job. That sentiment is likely spilling over into a consensus to be a bit more cautious with where and how they spend. While the quits rate is a backward-looking measure, I can take a forward-looking conclusion from it because it gives insight into what employees are thinking. In this case, it once again reaffirms that getting extra bullish on retail is probably not the best idea. If Americans are getting a bit more concerned or worried about the job market, then the idea they are going to start spending freely is probably too optimistic. Retail Sales Have Been Resilient While I have illustrated a couple of reasons for my neutral outlook for RETL, it is worth pointing out that the retail sector has been seeing some relative strength of late. I noted that RETL has posted a negative return over the last couple of years (since I last wrote about it), but in the short-term, this fund has indeed been benefiting from the macro-environment. For example, in the last month, the market - including the retail sector - have gotten a bit of a boost. This has coincided with US election results and the RETL ETF has soared:   RETL's 1-Month Performance (Seeking Alpha)And it isn't just investor enthusiasm that has been the driver of strong equity returns. Actual retail figures have been positive and - in the case of September results - have recently been revised higher. This shows that consumers are taking advantage of declining inflation rates in a big way:   US Retail Sales: Snapshot (U.S. Census Bureau)I think this is important to highlight because I am not sitting here saying there is nothing to be happy about when it comes to retail. Spending is up - partly because of inflation but partly because wages are up too - and this is translating to sales. There has been plenty of strength in the sector and RETL has been benefiting from that, so it would be remiss for me to not mention this in the review. There is an argument to be made for being bullish, and growing retail sales across the board is certainly helping that argument. But, to be fair, retail sales have been a bit volatile as shown in the negative August numbers. While September and October show a turnaround, I question the sustainability of this growth for the reasons I discussed earlier in the review. It is not that I don't see any good news, just not enough to pile on the risk through a 3X leveraged fund like RETL. I hope this sentiment is clear for why I hold a cautious view on this investment option, despite there being some good news that one could focus on. I Do Like The Idea Of Diversified Funds My next point on RETL is a positive. This is the fact that RETL has a built-in objective of tracking the retail sector. When it comes to investing strategy, my followers know I seldom choose individual stocks. I prefer to buy into sector funds for \"alpha\" and momentum plays. I like the idea of not putting all my eggs in one basket and limiting company-specific risk. Buying into sector ETFs limits volatility and isolated negative news on one company or idea. This is why I keep funds like RETL on my radar over time. To illustrate, readers can see that no individual holding represents more than 1.63% of total fund assets and the top holdings list is quite diverse given that these stocks are all considered the same sector:   RETL's Top Holdings (Direxion)So why do I view this positively? The answer is multifold. The first reason is what I stated above. I like diversifying my positions and not having to think about whether any individual CEO or management team is going to make negative news headlines. Simply put, it helps me sleep at night. The second reason is that global consumers are getting less and less loyal. This means that what is in fashion or in favor now may shift out of fashion or favor in the short term. So keeping broad exposure to a sector makes a lot of sense to me. To understand why, consider that consumers in advanced economies (including the US) are very willing to try (and perhaps switch) brands regularly:   Consumer Loyalty Trends (McKinsey)The conclusion I draw here is consumers are more than willing (and perhaps enjoy) switching brands and companies in this new age of retail. This makes holding a diversified basket of companies a much more effective strategy in my opinion than trying to select a handful of retail names that may be popular now and in the future. That seems a tall task given metrics like the one noted above, so I am going to consider this sector through ETFs (or CEFs) for the most part. Bottom-Line: This Is A Risk-On Strategy I will wrap-up this review by reiterating that retail plays could have a place in investor portfolios in 2025. But I am skeptical that now is a smart time to really amplify the risk lever. Remember that RETL is a 3X leveraged fund with a daily strategy. This means that investors may see big swings over time - and not always in their favor. The fund's website specifically says: \"should not be expected to track the underlying index over periods longer than one day\". This warning means that one needs to be prepared to be extra nimble with their positions or be willing to accept big moves over time. And this isn't a cautionary message for no reason. Consider that RETL will fall steeply if the sector declines. That is a given risk. But what is more concerning is that investors may not recognize that under-performance can occur even when the long-term trend is positive. That is because leveraged funds like RETL can see steep losses that may not fully recover from up days. Take a 5-year chart as an example. While the SPDR S&P Retail ETF (XRT) is up strongly over this timeframe, RETL is up modestly:   5-Year Return (XRT & RETL) (Google Finance)That shouldn't really be the case, given that RETL offers 3X exposure. If XRT is up, RETL should be up more given its strategy. But that strategy has inherent flaws, hence the under-performance even during a broader bull market.  I will wrap up this review by saying RETL looks like too risk-on of a play for me at this juncture and I cannot find a strong case to upgrade it at this time. Therefore, I will keep the hold/neutral rating in place and caution my followers to be very selective with entry points going forward.","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":"4.29.4","shortVersion":"4.29.4","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/2486089184"}