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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.

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):

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