The Tale of Two Retail ETFs

This is a 3-Year performance chart of the two largest Retail Industry ETFs by AUM, SPDR S&P Retail, $XRT (green line), and the VanEck Vectors Retail, $RTH (blue line).

Depending on which ETF you're looking at, Retail could either be in a structural uptrend and testing all-time highs, like $RTH... or a trendless mess and pressing on multi-year lows, like $XRT.

There is a common saying on Wall Street along the lines of, "it is a market of stocks, not a stock market." This couldn't be more true and divergences like the one I am showing in this post highlight this fact all the time. Even within the same subsector, you could experience very different returns over the long-run based on what stocks you have exposure to. Over the last 3-years, you would have made about 46% if you were invested in $RTH vs about -9% if you had invested in Retail through $XRT.

What's so different about these two ETFs that is causing such a drastic divergence over a multi-year timeframe? Simple, $RTH is cap-weighted and dominated by the big boys, while $XRT is equally weighted and spread among small, mid and large-cap sectors. In fact, $XRT only has a 23% allocation to large-caps while 97% of $RTH's holdings are large-caps. So, the lackluster performance from small-cap stocks relative to their large-cap peers that we've observed in recent years is definitely weighing on $XRT's performance.

Here is $XRT, pushing on support at key lows from 2016, 2017 and 2018. While the ETF is stuck in a multi-year sideways consolidation, at least risk is well-defined at key prior lows around 36.50 - 37.50.

The $RTH is tilted heavily towards the three most dominant retailers in the US, which are Amazon ($AMZN), Home Depot ($HD) and Walmart ($WMT). All three of these stocks are trading at or near record highs and together, comprise almost 40% of the ETF's holdings. Not surprisingly, $RTH's chart looks similar to their own as it is also near all-time highs. These same 3 companies make up less than 5% of the holdings in $XRT, as the ETF is equally-weighted and spread pretty evenly among almost 100 retailers.

Here is $RTH, consolidating just beneath its recent all-time highs which it made early last month. Unlike $XRT, this is a good looking chart and one I'd want to own if prices break back above the 112 level.

So, is Retail a hot mess and an area of the market we should want to stay away from? Or are prices building a constructive base within the context of a long-term uptrend, making this an industry that we want to be buying on a move back to its highs? As this post illustrates, that should all depend on which vehicle you are expressing your thesis through. Long story short, it is very important to know what you own. And in this case, it should be $RTH if anything at all.

Hope you enjoyed this post! As always, reach out to me at Strazza@thechartreport.com with any questions or comments.