The Best Way to Play the Holiday Retail Rally

Want to earn back some of that money you’re spending on gifts this holiday season? Invest in the very sector where you spent the money in the first place.
It’s no secret that U.S. retailers make a killing between Black Friday and Christmas. The National Retail Foundation projects that U.S. shoppers will spend a record $602 billion this holiday season. The average shopper will spend roughly $750 this holiday season.
For many retailers, the month leading up to Christmas is better than most entire quarters. The rush to buy retail stocks after Christmas is equally impressive.
U.S. retail stocks routinely thrive in the months that follow the holiday season. Strong fourth-quarter earnings are one reason. Another is simply perception – investors like to buy stocks in hot sectors. And few sectors are hotter than retail around the holidays.
Deciding which retailer to invest in after Christmas can be difficult. Fortunately, the SPDR S&P Retail ETF (XRT) allows you to invest in them all.
Created in 2006, the XRT tracks the performance of some of the top retailers in America. Amazon (Nasdaq: AMZN), Rite Aid (NYSE: RAD) and Men’s Wearhouse (NYSE: MW) are among the ETF’s top holdings. Consumer cyclicals make up three-quarters of the fund. The rest is comprised of consumer defensives and tech stocks.
The fund has performed quite well since its June 2006 inception. XRT shares have risen 129% since then – nearly three times the 43% gain in the S&P 500 over that span.
More than half of those gains have come in the three months that follow Christmas. The XRT has risen by an average of 10.3% from Dec. 26 to March 25 in its seven years of existence. Only once has the XRT fallen in the first quarter.
The last five years have been even more profitable, with the fund gaining an average of 14.2% from late December to late March. In fact, the XRT has failed to deliver anything less than 13% gains in only one of the past five first quarters.
Those numbers stand out – especially when matched against the late December-to-late March returns in the market. In the three months that followed Christmas, the S&P 500 has returned an average of 3.8% over the last five years. That’s less than a third of the 14.2% return in the XRT.
Profiting from the retail sector isn’t limited to the first quarter, however.
Whether you’re looking to make a quick 14% in three months or outperform the market over the next few years, investing in retail stocks isn’t a bad way to go. The U.S. retail market has recovered nicely since the recession. Retail sales are up 20% since 2009, outpacing the overall recovery in consumer spending by almost 3 to 1.
In light of those numbers, it makes sense to have retail exposure in your portfolio. In fact, one particular small cap retailer is one of our “Best Stocks for 2014.” Here is a link to the full report.
Holiday shopping season is winding down. For investors, retail shopping season is just getting started.