Retail Industry ETF: What It is, How It Works

What Is a Retail Industry ETF?

A retail industry ETF is an exchange-traded fund (ETF) that invests its capital solely in the stocks of companies that sell retail merchandise to consumers. Investors who want exposure to the retail sector purchase shares of a retail industry ETF hoping for appreciation in their investment.

Understanding a Retail Industry ETF

A retail industry ETF, as with other index ETFs, aims to match the investment performance of its underlying index. A retail industry ETF includes brick-and-mortar retailers as well as online merchants and can be found across many industries, including home improvement and furnishing stores, warehouse clubs and superstores, department stores and discount stores, and specialty stores and boutiques selling apparel, electronics, accessories, and footwear.

Some of the most big-name companies are retail companies, such as Amazon, Walmart, Costco, Macy's, Walgreens, and Best Buy. A retail industry ETF would purchase the stocks of these companies, with the expectation that their share price will rise in value.

The idea of a retail industry ETF is to provide an investor with broad exposure to the retail industry as opposed to investing in one or a few specific retail companies. This allows for diversification of an investor's portfolio within the sector as well as ease of management when compared to owning individual stocks. Managers of retail ETFs usually select an index to track and purchase the stocks of the companies in that index rather than choosing their own stocks.

A retail industry ETF’s performance correlates with the current economic level of consumer confidence. Therefore, a retail industry ETF performs best when consumer spending and the economy are robust and performs poorly when they are depressed.

Retail sales are a monthly economic indicator in the United States. The U.S. Census Bureau and the Department of Commerce compile data and release a retail sales report approximately two weeks after the month-end that covers the prior month. Year-against-year comparisons are an especially important metric because they take into account the seasonality of consumer-based retail.

ETFs that Bet Against Retail Stores

Some ETFs generate returns when the retail sector experiences a downturn. One example is the Decline of the Retail Store ETF (EMTY), created by ProShare Advisors, whose express aims are capitalizing on the declining share prices of retail stocks. Brick-and-mortar retail stores have suffered significantly with the rise of online shopping. Even traditional companies that incorporated online platforms struggled to compete with businesses such as Amazon.

The value of the EMTY ETF is designed to rise when the stocks within its tracked index fall. The fund accomplishes this by short-selling. Specifically, the ETF takes a short position against the Solactive-ProShares Bricks and Mortar Retail Store Index. Some of the brick-and-mortar stores included on the index that the ETF bets against are Autozone, Costco, Lowe's, and Target. The fund has not generated any significant returns and has performed especially poorly after the global pandemic began.

The Decline of the Retail Store ETF arises in the context of the recent decade’s continuing decline of retail stores up against online behemoths, namely Amazon. The Death by Amazon Index created by Bespoke Investment Group tracks brick-and-mortar retailers negatively impacted by online retailers.

Popular Retail Industry ETFs

There is a variety of retail industry ETFs that investors can choose from. Like any investment, it's important to do your research before committing to a purchase. Areas that investors should focus on are past performance, portfolio composition, expense ratio, the benchmark index, and the specific industry the fund focuses on. Some popular retail industry ETFs are as follows:

• SPDR S&P Retail ETF (XRT)
• Amplify Online Retail ETF (IBUY)
• ProShares Online Retail ETF (ONLN)
• VanEck Vectors Retail ETF (RTH)

The Bottom Line

A retail ETF is an investment fund that buys the stocks of companies that sell merchandise to consumers. This type of investment offers broad exposure to part of the retail market, without relying on the performance of any single company. There are many different retail ETFs to choose from, so it is important to research the options carefully before making an investment.