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 that are seeking exposure to the retail sector would purchase shares of a retail industry ETF hoping for appreciation in their investment.

Key Takeaways

  • A retail industry ETF is an exchange-traded fund (ETF) whose capital is invested in the stocks of retail companies.
  • Retail companies include a variety of stores, with common brand names including Walmart, Macy's, Costco, and Best Buy.
  • Retail companies, particularly brick-and-mortar companies, have had a difficult time competing with the rise and success of Internet companies, such as Amazon.

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 them 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.

Betting Against Retail Stores

In November 2017, CNBC reported on a new exchange-traded fund called 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 over the past two decades 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 the 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 Rite Aid, Best Buy, Macy’s, and Bed Bath & Beyond. The fund has not generated any significant returns and has performed especially poorly after the Coronavirus 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. CNBC’s reportage also highlights the Death by Amazon index created by Bespoke Investment Group, which tracks over 60 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)