Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the retail sector to thrive over time as our global population grows, economies develop, and more people want to buy things, the Market Vectors Retail ETF (NYSE: RTH) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The retail ETF's expense ratio -- its annual fee -- is a relatively low 0.35%. The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF doesn't have much of a performance history, as it's very new -- the result of an overhauled and discontinued Retail HOLDR. It's the future that counts most, though, and whether you're bullish on its components. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
Some retail companies had strong performances over the past year. Sysco (NYSE: SYY), which surged 16%, may not come to mind as a retail company, but as America's food distribution titan, it keeps restaurants, hotels, and food retailers running. Business has slowed recently, due in part to rising food prices and slowing restaurant traffic. Still, it's a dividend titan, and has been able to maintain its profit margins while cutting costs. The recent drought that's hiking corn prices is a concern, though, and food-price inflation in general can hurt the company by putting pressure on profit margins.
Other companies didn't do quite as well last year, but could see their fortunes change in the coming years. Walgreen (NYSE: WAG) advanced 6%, finally having reconciled with pharmacy benefits manager Express Scripts. The severing of that relationship cost Walgreen gobs of customers and billions of dollars. With Express Scripts acquiring Medco Health, another massive pharmacy benefits manager, it's more important than ever for both Walgreen and CVS to have strong deals with it. Walgreen's 3.1% dividend is a big draw for investors, and some are hopeful about its expansion abroad, such as via its $6.7 billion investment in Europe's Alliance Boots drugstore chain.
Netflix (Nasdaq: NFLX) plunged 74%, with management blunders freaking investors out as a Qwikster service was announced and then canceled, and price increases were seen as too severe. The company is still trying to steer more customers toward its more lucrative streaming service, which is smart, but it's also facing some strong competitors. It's expanding internationally, but that may not deliver much of a boost to its bottom line anytime soon, in part because Netflix is still spending big bucks to widen its catalog.
Best Buy (NYSE: BBY) sank 23%, but some worry that it might sink much deeper. Its recent disappointing quarter featured profits down 90%, in part due to store closings. The company didn't pounce on founder Richard Schulze's offer to buy the company, and its future is now more uncertain.
The big picture
Demand for retail isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
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