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Summary Strength in retail was a major factor in the Q3 U.S. GDP read. The sector looks very strong going into 2015. The ETFs discussed in this article provide easy and affordable access to the sector. The latest read on U.S. GDP growth surprised many. Analysts were expecting a pretty big number, but Q3 growth of 5% smashed estimates. With the energy sector, oil especially, in a steady decline, some have been left scratching their heads as to where this growth is coming from. After a sustained slump, it looks like retail is back in the game, especially going into Q4. The sector overall is looking good, as lower gas prices and higher employment leave consumers with more money to spend on discretionary items. Retail back in business According to some of the macro numbers that have been released recently, the retail sector seems to be picking up strength as we near the end of the year. November retail sales rose 0.7% year-over-year for the best performance in eight months, beating estimates for a 0.4% increase, in part due to falling oil prices and increased employment. In fact, gas prices are at their lowest point in four years, and the hiring increase has been the largest in over a decade. Higher spending is distributed quite evenly across product categories, such as electronics and furniture, although car sales seem to be doing particularly well. Sales of cars and light trucks hit an annualized rate of 17.1 million in November, up from 16.4 million in the month before. Excluding autos, retail sales rose 0.5% versus an expected 0.1%. The fact that consumers are spending their higher disposable income instead of squirreling it away is encouraging, and indicates that consumers are optimistic about the economy. Things aren’t expected to slow down in Q4 either. Growth of 5% in Q3 GDP came in well ahead of a previous estimate of 3.9%, and comes on top of a 4.6% increase last quarter after a fairly easy comp with last year’s harsh winter. There are a host of indications that the U.S. economy may be shifting gears. Personal spending jumped 0.6% together with a 0.4% rise in personal income. This strong performance is expected to carry over into Q4, with projected growth revised up to 2.8% from a previous 2.6%. Getting in For investors looking to ride the strength of the U.S. consumer, without putting in too much effort, retail ETFs look like a good bet. Let’s take a look at a few of the options in the consumer discretionary space. As usual, the obvious choice is SPDR’s offering: the S&P retail ETF (NYSEARCA: XRT ). With around $1.7 billion in AUM, it’s the largest and also the most liquid. The expense ratio is fairly low at 0.35%. A bit pricey at around 19 times trailing earnings overall, the ETF is up around 8% year-to-date. Its three biggest holdings are Whole Foods (NASDAQ: WFM ), Tractor Supply (NASDAQ: TSCO ) and L Brands (NYSE: LB ), and some 74% of its holdings are classed under consumer cyclicals, making it a slightly more volatile play than the next ETF choice. Another option, and one which has performed considerably better, is the Market Vectors Retail ETF (NYSEARCA: RTH ), which is up 17% so far this year. A more defensive option, roughly 38% of the ETFs holdings are in the consumer defensive space. Its three biggest holdings are Wal-Mart (NYSE: WMT ), Amazon (NASDAQ: AMZN ) and Home Depot (NYSE: HD ). At an expense ratio of 0.35%, it’s fairly inexpensive, and the P/E ratio of 19 times trailing earnings is also in line with SPDR’s comparable ETF. A more actively managed choice would be Powershares Dynamic Retail (NYSEARCA: PMR ). This active management results in a higher expense ratio of 0.63%, and the ETF is up around 11% so far this year. At the moment, its top holdings are Costco (NASDAQ: COST ), Kroger (NYSE: KR ) and O’Reilly Automotive (NASDAQ: ORLY ). All stocks in the basket are screened on a number of fundamental growth metrics, and are moved up or down in weight accordingly. As it has not outperformed the Market Vectors Retail ETF, and is pricier in terms of expense ratio, this one looks a bit less enticing. For me, Market Vectors’ offering looks like the best bet due to its low expense ratio, solid performance this year, and relatively defensive character. However, all three will do a good job in providing a portfolio with some exposure to strength in U.S. retail. Conclusion There are now tangible signs that the U.S. economy is picking up steam, with a huge Q3 GDP beat fueling expectations for further growth. Retail sales have been a major driver behind this increase, and the sector looks excellent going into the holiday season. The three ETFs discussed here provide affordable and efficient access to the consumer discretionary sector, and getting in before the holiday figures come in could provide some very decent returns going into 2015. Scalper1 News
Scalper1 News