Learn about retail ETFs and what to look for when choosing among them.
Definition and Example of Retail ETFs
One popular retail ETF is the VanEck Retail ETF (RTH), which seeks to track the MVIS U.S. Listed Retail 25 Index. The fund includes stocks from the 25 most liquid publicly traded companies in the U.S. Companies held by the fund include retail distributors, wholesalers, online merchants, direct mail and TV retailers, specialty retailers, and food and staple retailers.
How Do Retail ETFs Work?
Retail ETFs are structured just like any other ETF. First, the fund manager picks an index to track. With an index in mind, the fund manager will purchase stocks using investor funds, hopefully in a way that replicates the performance of the underlying index. By purchasing ETF shares, you track the index without buying every stock listed on it individually. When choosing among retail ETFs, you should consider the major factors that impact them, such as assets under management (AUM) and expense ratios. Consider these points when choosing the best retail ETF for your needs:
Assets under managementExpense ratiosHoldingsIndustry focusPerformance
Assets Under Management
ETFs with higher AUM may be preferable to ETFs with lower AUM, because in most cases more assets provide greater liquidity. In turn, that usually means a lower bid/ask spread and less price volatility.
Expense Ratios
All other things being equal, two retail ETFs that track the same index should perform about the same. This is true as long as they’re passively managed. Therefore, the fund with the lowest expense ratio may ultimately make you more money, especially as the savings from a lower expense ratio compound over the long term. But what if the two funds you are comparing invest in different indexes? What if they are actively managed? In those cases, you’ll have to compare the expense ratios to the holdings and performance.
Holdings
“Holdings” are what ETFs call the stocks they contain. You may be interested in a specific stock, but you also want exposure to the entire retail industry. You can look at an ETF’s holdings to ensure it has what you’re looking for. ETFs with a greater number of holdings can also provide more diversification and less volatility than more narrowly focused funds.
Industry Focus
Some retail ETFs invest broadly in all retail companies; others focus on specific subsections of the retail industry. It’s important to understand the specific focus of an ETF before investing.
Performance
Past performance is no guarantee of future results. Reviewing past annualized returns can give you an idea of what to expect in the future under specific market conditions if you measure performance against what was influencing the market at that time.
Retail ETF Examples
As with most industries, there are many ETFs you can choose from to track the retail sector. Here are four ETF options you can consider, but make sure to do your own research and ensure that they fit within your overall investment strategy before you buy any of these products. The information here is current as of June 17, 2022.
What It Means for Individual Investors
Retail ETFs are another way for individual investors to access the stocks of companies operating in the retail industry. Because there are thousands of companies to choose from, it takes a significant amount of time to evaluate which stocks you’d want to buy. While you could purchase the stocks, it is much more expensive, and you’ll need to maintain the portfolio yourself. Exchange-traded funds are passively managed and have relatively low fees compared to mutual funds. Retail ETFs are an excellent choice for getting started if you’re looking for a way to gain cost-effective exposure and diversity from multiple retail companies. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
