Retailing Ruckus

Published on Sunday, 03 June 2012 09:28 Written by Todd Shriber

Following a bad April and a worse May for U.S. stocks, it can be said that some sectors that held up relatively well during those grim two months are starting to look vulnerable. Not that many sectors and their corresponding ETFs did hold up well in April and May, but there were pockets of strength here and there. Retailers are a prime example of the "less bad" performances investors could have found over the past two months. The sector is also starting to show some dents in its armor.

The spate of negative economic data out this week, culminating with Friday’s shockingly bad May jobs report, shines the spotlight on the vulnerability of U.S. retailers and their stocks. The Commerce Department’s most recent reading of first-quarter GDP growth fell to 1.9% from 2.2%. That’s a tell right there that consumers aren’t spending the way the economy needs them to be and that could be a harbinger of weakness to come for ETFs such as the Market Vectors Retail ETF (NYSE: RTH).

To RTH’s credit, it has been one of the retail ETFs that has been "less bad" relative to other sector funds in the past month. What that means is that while RTH has turned in a negative performance, it hasn’t been as bad as the broader market.

The ETF does have some things working in its favor. It allocates 13.3% of its weight to Wal-Mart (NYSE: WMT), the world’s largest retailer. That sizable allocation to Wal-Mart has helped RTH keep its head above water because Wal-Mart was the Dow’s top performer and one of the top-five performers in the S&P 500 during the month of May.

An almost 9% allocation to Amazon.com (NASDAQ: AMZN) would normally be considered problematic because Amazon is a high beta, technically vulnerable stock that isn’t in favor in this risk off environment. However, the rest of RTH’s top-10 holdings reside on the lower beta end of the retail spectrum. CVS Caremark (NYSE: CVS), Costco (NASDAQ: COST) and Target (NYSE: TGT) are arguably as much staples stocks as they are retailers.

Wal-Mart, CVS, Target and Costco account for 30% of RTH’s weight, meaning the fund is a more conservative retail play. The back end of RTH is what might give investors some pause. That’s where you’ll find stocks such as Best Buy (NYSE: BBY), J.C. Penney (NYSE: JCP) and Netflix (NASDAQ: NFLX). Those are bad stocks right and in the case of the first two; they probably will be bad for quite a while. Fortunately, that trio accounts for less than 3% of RTH’s overall weight.

Bottom line: It’s good news that Wal-Mart will run RTH’s show over the near-term. The bad news is that’s no guarantee RTH will be anything more than less worse compared to the broader market.