Ugly in a Hurry
by Tom Brakke, Research Puzzle
Consumer cyclical stocks have had a great run, with retail slightly underperforming the sector, but doing well nonetheless. But, have the worm and the tape turned?
In the top panel of the chart, you can see the performance of two retail ETFs and the S&P 500. The bottom panel shows the relative performance of the two ETFs versus that index.
Some information about the ETFs: XRT is equal weighted, with 98 holdings currently. For what it’s worth, the largest holdings (all in the 1.15% area) are Groupon, Shutterfly, and GameStop. RTH is market weighted, with 26 holdings, meaning that stocks like Wal-Mart, Home Depot, and Amazon.com have big weightings (together totaling 28%). Two very different animals.
One fund has over $900 million in assets and the other has $40 million. You would be forgiven for thinking that the one slanted toward big companies has the big money in it, but it’s the other way around.
XRT has now given up half of its outperformance over the last two years within about six weeks. Perhaps that’s not surprising given the number of shortfalls being announced in retail and the resulting stock declines.
This is an interesting situation. Can the optimism about retail and other consumer stocks be maintained in the face of disappointing news? More importantly for the market in general, what will happen if the equal-weighted (or should I say non-market-weighted) fervor that has been driving investor flows starts to reverse?
A bunch of these ETFs (and lots of actively-managed strategies too) could get ugly in a hurry. (Chart: Bloomberg terminal.)
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