ETF Expert

If you've heard it once, you've probably heard it three thousand times: The consumer is weak.

In fact, you've probably heard a whole lot more than that. The consumer can't get access to credit. The consumer is unwilling to spend because of job uncertainty. Or… the American consumer has finally started down a road of saving. (Americans are savers now? Really?)

If Americans are genuinely tapped out, then why the sudden optimism from Best Buy? The largest U.S. electronics chain jumped 15 percentage points on the company guiding full-year earnings above expectations.

So maybe electronics are different, you say. You'd jump over your own grandmother's candy dish just to get your mitts on the latest flat screen. Fair enough.

Still, that wouldn't explain the relative strength in all 3 of the prominent retail ETFs. The S&P SPDR Retail Fund (XRT) is up an astonishing 17% YTD. Meanwhile, the Powershares Dynamic Retail Fund (PMR) gained 7.5% while the Wal-Mart heavy Retail HLDRs (RTH) is basically flat with a 2% gain at the time of this writing.

Regardless of the chosen retail fund, the investments are soundly beating the market's barometer, the S&P 500 SPDR (SPY). So how is it that a sub-segment of consumer discretionary spending is pummeling an index of the world's top businesses? If the consumer led us out of the last recession, and business is supposed to lead us out of this one, why all of the lovin' for retailers?

The answer lies in the nature of the retailers themselves. For instance, the S&P SPDR Retail Fund (XRT) is not unceremoniously held hostage by Tiffany's, Home Depot, Expedia and CarMax; rather, XRT takes an equal-weighted approach to a cross-section of 50 companies that include Wal-Mart, Best Buy, Amazon, Family Dollar… as well as the more beaten-up names listed above.

It follows that, a fair number of investors feel that Americans will eventually spend again. By and large, many are already spending at so-called lower-end companies that are profiting handsomely in the recession.

Granted, Powershares Retail (PMR) may be lagging the aforementioned XRT. This has more to do with the "dynamic" index construction that evaluates companies based on a proprietary "merit" criteria, including fundamental growth and stock valuation. Consequently, some of the 30 chosen holdings of the tracked index may have a 5% weighting, while others may have a 2% weighting.

Retail HLDRs (RTH) have been around the longest. In many ways, the baskets are approaching obsolescence. At the same time, investors trade the heck out of these ETFs with exceptionally high volume. During 2008, RTH was a prime performer because of a 25% weighting in Wal-Mart… a seeming beneficiary of the turbulent economy. Yet in 2009, the skewed weighting has meant skewed results.

No matter… because retailers in any form have been beating the pants off the overall market. We can blame that on financials. We can blame it on industrials. We can even talk about the volatility in energy, materials and utilities.

Yet the fact remains… retail ETFs have been tough to beat. And it would appear that investors see hope in the American spender, not the American saver.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.