Today's Buy Opportunity: SPDR S&P Retail ETF

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Consumer spending accounts for approximately 70% of our nation's economy. With so many dollars at stake, it's only natural that one of the biggest consumer spending sectors -- retail writ large -- is highly competitive. If customers can buy an item or service cheaper someplace else, usually they will, so there is little shopper loyalty. This results in low margins at most retail stores. Throw in inflated inventory risks, high employee turnover, and not infrequent bankruptcies, and consumer retail is not the prettiest sector on the market.

However, consumer retailing is so immense and grows so reliably with the economy, you definitely want to invest in it. Simply buying the SPDR S&P Retail (NYSE: XRT  ) exchange trade fund is a great way to gain diverse exposure to virtually all retail markets in one swoop, while decreasing your risks.

Fast facts on SPDR S&P Retail ETF

Total Net Assets

$455 million

Number of Stocks

68

Gross Expense Ratio

0.35%

Dividend Yield

1.33%

Weighted Average Market Cap

$10.6 billion

Median Market Cap

$3.5 billion

Source: SPDR website. As of Sept. 27.

It's all about the fund
An ETF is a mutual fund that trades like a stock. When it's passively managed, it's like an index fund. Today's highlighted ETF replicates the S&P Retail Select Index, so it isn't actively managed, and therefore it charges low fees (0.35%) and has low turnover. What you get is straight performance. When this S&P index of 66 leading retailers goes up in price, the ETF mirrors it.

Many retail ETFs are heavily weighted in giants of the industry, specifically Wal-Mart (NYSE: WMT  ) and Home Depot (NYSE: HD  ) . In fact, those two stocks alone accounted for a whole 30% of the value of other retail ETFs I considered. Wal-Mart's stock hasn't gone anywhere in more than 10 years, so I don't want to put a lot of weight behind it. Thankfully, the SPDR S&P Retail ETF doesn't give any preference to company size. It's equal-weighted, meaning that each of its 68 stocks represents about 1.5% of the fund. This provides ample room for many smaller companies, like Chico's FAS (NYSE: CHS  ) , to perform and make a difference in total results. At the same time, your risks are evenly spread.

The mall ain't all where it's at …
If you think this retail ETF is just hanging out at the local mall trying to look cool, think again. It's also invested in online retailers including Amazon.com and Netflix (Nasdaq: NFLX  ) ; automotive parts retailers including Advance Auto Parts and O'Reilly Automotive (Nasdaq: ORLY  ) ; big-box specialty shops such as Best Buy and Dick's Sporting Goods, and smaller, niche chains, including Tractor Supply Co.

Take a gander at how diverse the ETF is by retail slice:

As of Sept. 27, 2010. Source: SPDR website.


As of Sept. 27, 2010. Source: SPDR website.

Yes, America likes to wear clothes (thankfully), so it's fitting that apparel retailers represent the largest portion of the fund, at nearly 32%. Specialty stores ring in second at nearly 17%, and automotive retailers rounds out third place, at nearly 11%  -- America likes to wear clothes and drive cars.

Fourth place is given to fashionable department stores such as Nordstrom, Macy's and Tiffany & Co. -- Tiffany's being at least one Fool's favorite (see our related 11 O'Clock Stock video). Finally, food retailers come out smelling like roses, in fifth place at 7% of the fund. Whole Foods (Nasdaq: WFMI  ) to Safeway are represented.

We're all value shoppers
To close out this sale, let's ask, "Why retail, and why now?" Being so tied to the consumer economy, retail stocks are ultra sensitive to things like consumer confidence and unemployment data. Those reports are still anything but rosy, and that has kept many retail stocks depressed. That's exactly when you want to buy them, in advance of the next resurgence in consumer spending that is almost inevitable, whether it begins in December or two years from now. Americans have been saving more money all year, and eventually they'll spend it.

Positions in this ETF trade at an average price-to-earnings multiple of 14.4 times expected earnings for the year, and 2.2 times book value. Also, the index trades at 7.8 times cash flow. Earnings at the average company are expected to rebound and grow by double digits (13.8%) the next three years. If so, the ETF should gain about as much, and perhaps more as its P/E multiple expands. Because investors get too excited about retail in the best of times, retail stocks can trade near a P/E of 20 or above near cycle peaks. We won't bank on that, but history suggests we have this extra potential upside.

Put this ETF package together with a bow, and we have relatively low valuation risk, attractive upside, and a diverse investment that captures most of the retailers you know and use, and even some that you don't. Add the SPDR S&P Retail ETF to your portfolio, and you've got retail in the bag.

Interested in reading more about the SPDR S&P Retail ETF? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Previous recommendations (Click here for full list of recommendations and performance):

Come back to Fool.com tomorrow for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well!

"11 O'Clock Stock" is sponsored by Motley Fool Stock Advisor. The Motley Fool will wait at least 24 hours after this publication before purchasing shares of SPDR S&P Retail ETF. To see an FAQ on "11 O'Clock Stock," click here.

Jeff Fischer, advisor of Motley Fool Pro and Motley Fool Options, does not own shares of any companies mentioned above. Best Buy, Home Depot, and Wal-Mart Stores are Motley Fool Inside Value selections. Amazon.com, Best Buy, Netflix, and Whole Foods Market are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Best Buy and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 29, 2010, at 12:17 PM, kahunacfa wrote:

    Although sector Exchange Traded Funds are a good way to invest broadly in a macro sector, it is far, far better to buy the best positioned companies in a favorable sector such as retail.

    Yes it is necessary to be right twice, once on the sector and again on the specific company, but that is how an outstanding portfolio is constructed by a CFA.

    Aloha,

    Kahuna, CFA

    le 29 septembre 2010

  • Report this Comment On September 29, 2010, at 12:34 PM, summitclark wrote:

    Food for thought.

    "Can an ETF Collapse"

    Article about the huge short interest in XRT.

    http://boganassociates.com/whitepapers.html

  • Report this Comment On September 29, 2010, at 2:08 PM, goalie37 wrote:

    Motley Fool suggesting we buy and ETF? Noooooo! Please let me wake up from this nightmare!

  • Report this Comment On September 29, 2010, at 2:09 PM, goalie37 wrote:

    "an" not "and"

  • Report this Comment On September 29, 2010, at 2:42 PM, TMFFischer wrote:

    Greetings,

    100% stock-based ETFs (let alone index ETFs -- which is all the original SPY ever was) are certainly worth consideration, and were among the Fool's very first recommendations. Don't let futures-based ETFs (which are flawed) taint your view of all ETFs. Those that own stocks or commodities directly are asset-based. And when they have very low fees, like SPDR or Vanguard ETFs, they can be excellent investment tools.

    The "ETF Collapse" article has been debunked, especially in relation to XRT. Any redemption is controlled.

    Finally, I agree that buying superior stocks is the best way to out-sized returns, but in some competitive sectors (young biotechs, retail), finding the few good winners is not easy, and a diverse ETF can be a good solution if you believe in the sector overall.

    Thanks for comments!

  • Report this Comment On September 30, 2010, at 10:26 AM, MegaEurope wrote:

    "Earnings at the average company are expected to rebound and grow by double digits (13.8%) the next three years."

    If you believe that I have a bridge in Brooklyn to sell you.

    Analysts are notorious for overestimating earnings growth, but that number seems crazy even by their standards.

  • Report this Comment On September 30, 2010, at 1:36 PM, TMFFischer wrote:

    Greetings MegaEurope,

    I agree, the earnings estimates did look a bit aggressive, but they're starting from a depressed base and assume that these healthy (and many are small) companies can bounce back quite well. Chico's earnings this year, for example, are expected to jump 50% from their hole; ORLY is expected to put up 26% earnings growth this year; Best Buy, 14%. So, averaging 13% or so percent overall may be less of a stretch than it sounds like, because the larger companies can generally grow around 10% in a decent year given all the levers they have to pull and push, and the smaller companies much more than that in a recovery. But still, it's a blended average over 66 stocks, so... It does rely on an economic recovery of some meaning in any case. But downside risk should be modest while waiting (to about 11x earnings or so, most likely, from 14x, and earnings are still ticking up now even in a slow recovery)... Best, Jeff

  • Report this Comment On September 30, 2010, at 9:24 PM, MegaEurope wrote:

    In my opinion, retail earnings are not currently depressed. They already roared back from 2008-early 2009 levels.

  • Report this Comment On October 01, 2010, at 11:20 PM, Pat4Ra wrote:

    Why now when the price is so up? Could have suggested 6 weeks ago!

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