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Should You Go Shopping For Retail ETFs?

Specialty retailer revenues should benefit from sustained economic growth and net new retail store openings, despite peer-group consolidation and store closings, according to S&P Capital IQ. We expect specialty retail revenues to increase at mid-single-digit rates annually through 2016. Steadily improving macroeconomic fundamentals, which include declining U.S. unemployment, increased consumer confidence, and low borrowing costs that further boost personal consumption and housing affordability and activity, should continue to underpin the specialty retail industry in 2015 and 2016.

Home improvement retailers, such as Home Depot and Lowe’s, will likely experience mid-single digit revenue growth in the next fiscal year according to S&P Capital IQ Equity Analyst Efraim Levy, driven by new store additions and the benefits of a recovery in the housing market and improving consumer confidence.

Consumer confidence closed 2014 at 93.1, the highest year-end level since 90.6 in 2007, according to the Conference Board. As of March 2015, the index had reached 101.3.  

Within apparel retailers, Levy thinks off-price retailers such as TJX Companies and Ross Stores have fared slightly better than average on market share gains, thanks to an array of value-priced merchandise. Meanwhile, footwear retailers such as Foot Locker have also benefited from innovation in product offerings and the secular trend of more people leading an active lifestyle. Conversely, some apparel companies such as Abercrombie &Fitch and Guess? have fared relatively worse with expected sales declines and store closures.

While there is a divergence in gross margins among sub-industries and among individual companies, home furnishings, apparel, and computer & electronics tend to be among the highest. Among automotive retailers, auto dealerships have well below industry-average gross margins, typically in the mid-teens percentages, while Levy notes that auto parts retail chains such as AutoNation can have gross margins more than three-times that of the dealerships.

My colleague Lindsey Bell noted last month how important the retail earnings were in the fourth quarter to the broader S&P 500 Index

Investors have increasingly been using ETFs from  SSGA, Market Vectors and PowerShares in a tactical manner to gain exposure to retail, while benefiting from their low-cost, passive nature and the ability to make intra-day trades. However, exposure to the specialty retail industry as well as cost factors is different for various ETFs, which is why investors should look inside before considering investing.

My colleagues recently published an Industry Survey highlighting the drivers of the specialty retail industry. Email wealth@spcapitaliq.com to gain access to the content. In addition, S&P Capital IQ has research and rankings on various financial stocks and ETFs. Visit http://trymsatoday.com/ to learn more and to read the full article.

Follow me on Twitter: @ToddSPCAPIQ

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