Black Friday Retail ETF View: XRT, RTH And 3 Things Many Miss With ETFs

seekingalpha11-25

With the holiday shopping season about to move into high gear, I analyze 2 leading retail stock ETFs.They could not be more different in terms of how they allocate holdings, and while I prefer RTH ...

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I also managed 3 different mutual funds once upon a time, so I've seen it from the inside as well. And that's why, when the editors asked if I'd offer my take on a pair of ETFs that own stocks in the retail industry, subsidiary of the consumer discretionary sector, I was happy to oblige. And, just in time for Black Friday, which is the day financial TV hosts are so grateful for these stocks. Why? Because the day after Thanksgiving, on a light trading day before a weekend, when many on Wall Street are nowhere near their trading screen, what else is there to talk about? So before the holiday cheer sets in too deeply, here's a straightforward comparison and contrasting of the VanEck Retail ETF (NASDAQ:RTH) and the SPDR S&P Retail ETF (NYSEARCA:XRT), which have been around for a while. And, since this is one of the few areas that the giant iShares ETF brand has not directly targeted, these 2 ETFs are the first ones I'd assume investors would look at when considering using ETFs to participate in this space. 2 ETFs that help investors understand what ETFs really are This is also a great example to highlight 3 very important aspects of ETF investing that I suspect many investors simply skip past, since so much of this industry is about asset-gathering and selling products, rather than about using ETFs in the way I think they are most valuable: not so much to own \"the whole market,\" but to own stocks, we like but with some added \"cushion\" from diversification. However, too much of that good thing can blunt the advantages of spreading risk. And that is the first thing about ETF investing revealed in these 2 retail funds. Namely, that beyond the same, the structure matters a lot. And it is not about how many stocks an ETF owns, but rather how many it has that are large enough to influence how the ETF at large performs. Tiny positions don't move the needle like those stocks that occupy 4%, 5%, or in the case of one of these ETFs, nearly 20% of the total fund. The other 2 ETF issues I'll cover here: size of an ETF matters a lot less than people think. It is all about the liquidity of the underlying holdings. And, ETFs can be excellent tools for \"tactical\" investing, since modern markets tend to reward sub-segments of the equity universe in sharper, shorter-term moves. 3 keys to better ETF analysis: 1. Diversification (enough but not too much) 2. Liquidity (small ETFs can be as or more liquid as larger ones) 3. Seeing ETFs as tactical tools to meet the challenges of modern markets Now, let's dive into RTH, which I like but don't currently own, and XRT, which is too diversified and thus not on my radar screen. That doesn't mean I'm negative on it, just that I don't think it is nearly as efficient a vehicle for what I want as RTH is. Let's start with their relative size. Neither is that big, which is fine by me. They are plenty big enough, each more than $200 million in assets. And while I think expense ratio is the source of a lot of bad investing decisions...because people give it too much thought, when they should look past minor differences in \"cost\"... I'll note that these 2 are both at 0.35%. Seeking Alpha There is not much dividend yield in this industry, so I'll skip past that and point out that RTH is apparently more for long-term investors, given the lighter daily trading versus XRT. But since RTH is loaded with some of the most liquid US stocks, buying and selling shares in size is rarely if ever an issue. That is what matters, since ETF liquidity is about the ability for market makers to buy and sell the UNDERLYING stocks, not the ETF itself. That keeps the bid-offer spread for the ETF itself very tight. This is what signifies high liquidity, not the assets under management. Yet so many comments I receive imply that this not getting through to enough investors. Seeking Alpha So these are both ETFs that invest in retail stocks. Aren't they all the same? Not at all. But this is where so many investors, when presented with ETFs as an alternative or complement to single stock ownership, don't give themselves a chance. The most popular ETFs are the ones that own the S&P 500 index. But those are \"one-trick ponies\" so to speak. They do one thing, by tracking one (top-heavy) index. Underneath the surface, that index and the broader stock market, is like a puzzle. But instead of endeavoring to break the puzzle into pieces and pick the ones that are the best fit for them, investors just sign up for the same puzzle everyone else has. That works until it doesn't. When it comes to RTH and XRT, there's obviously something different between them. That's what this historical return table says. The past 1 and 5-year periods have been roughly equal, but the 3 year and 10 year returns are completely different. We'll see why in a moment. Seeking Alpha Holdings comparison: no comparison! Looking at it from high above, RTH did much better during those 2 misaligned periods because some of its 26 holdings far outperformed the retail sector in general. And since RTH has more than 70% of assets in just 10 stocks, it is far more \"concentrated\" versus XRT's more equal weighting. I strongly prefer concentrated ETFs, since I view sector and industry funds as just one cog in my total portfolio wheel. 10 stocks driving one piece of my puzzle is plenty! That said, some may prefer to diversify more broadly, which would be a motivation to favor XRT over RTH. There are no right answers, just what fits the individual investor. Seeking Alpha Now let's take a look at the holdings themselves. I have 3 pictures below, showing the top holdings side by side, then the largest common holdings and the largest holdings unique to each ETF. First, we can see where that performance difference came from. Amazon (AMZN)'s big gains the past decade were the largest separator here. But AMZN has been more on par with retail stock performance more recently, which is why they are correlated lately. Amazon's superior performance has been supplemented by other RTH top holdings including the foursome of Walmart (WMT), Costco (COST), Home Depot (HD) and Lowe's (LOW). Seeking Alpha This common holdings view is the whole story regarding how these ETFs are different, and why one would choose one path or the other. I personally don't want a little piece of 79 stocks. I prefer to know what I own, since my total portfolio likely never would allocate more than 10% to an ETF like these. So even that Amazon 20% weighting is only 1% of portfolio if I had a 5% RTH position. Seeking Alpha As for what is different between the 2 ETFs at the stock level, a big position with RTH that goes awry (such as a health retailer amid speculation about a major change in that business) is naturally a bigger source of risk with RTH, since no one stock really can influence XRT that much. Seeking Alpha Here is how that performance table above looks as a chart. Similar on a 1-year rolling basis but for that spike from AMZN and other mega caps. Data by YCharts I LIKE concentrated ETFs. I write it all the time here. Most investors look at ETFs for \"diversification\" while I see them as a way to get access to micro-baskets of stocks in a market area. So I come at this in the same way as I assess ETFs in other industries, sectors and stock market themes. I like a concentrated ETF. And while neither of these is on my radar, I'll supply \"ratings\" for each since I know folks tend to prefer that here. Charts: big cap retail stocks to underperform That could have been the title of this article, but I felt that the current chart view, while often my primary point in articles, was less of a story to me currently than using the 2 retail ETFs to make some broader points about ETF investing. This is XRT, and it looks to be building a decent base to move higher from. With retail sales figures popping up on and after Black Friday, perhaps there's some short-term price momentum to come here. Barchart And, while RTH is the ETF I prefer structurally, this is one reason it is not screaming at me to own it now. This chart has some potential, but those mega cap stocks are overvalued. So there isn't tremendous long-term upside here without a lot of risk attached. That's my view on the overall US large cap stock market, so that makes sense given the presence of a few key Dow 30 stocks and others like them, which make up a hefty amount of RTH's total weighting. Barchart Concluding thoughts I like RTH as one to watch, and my choice if and when I allocate to a retail ETF. XRT is not likely one I'd consider as a true portfolio position, only as a trade if, for instance, that chart really became too good to ignore.  So I rate both of these as holds, but hopefully the value of this article is in peeling back the ETF structure. And with retail sales in the spotlight through year-end, this stark difference in structure should help investors make their own decisions.","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/2486211797"}