Black Friday Isn't The Only Looming Catalyst For Retail ETFs

After feasting on turkey, stuffing and football, many Americans will be hitting malls and shopping centers Friday to celebrate Black Friday, a contrived retail notion that, in the eyes of many, marks the official start of the holiday shopping season.

Black Friday is widely believed to be a catalyst for retail stocks and the corresponding exchange-traded funds, but that group has already been in rally mode. For example, the SPDR S&P Retail (ETF)XRT, the largest retail ETF, is up more than 9 percent this month and hit a 52-week high earlier this week.

More Than A Single Event; It's A 'Season' For A Reason

Still, XRT and other retail ETFs are attempting to play catch-up relative to the S&P 500 and the group remains a favored target of short sellers. However, that also means forced short covering some of XRT's components could lift the ETF in the coming weeks, particularly if retailers' Black Friday data excite investors.

“The SPDR S&P Retail ETF, whose year to date (ytd) total returns were 9 percent behind those delivered by the SPDR S&P 500 ETF Trust SPY on the eve of the election, is now only 3 percent behind the market after a 9 percent surge. Investors have been keen to ride this trend as ETFs exposed to US retail shares have seen $260 million of inflows over November; the highest in over 18 months,” said Markit in a recent note.

Short Selling XRT

Growing short interest in XRT itself is not cause for alarm as the ETF has a long history of being one of the most heavily shorted ETFs on the market.

Apparel retailers and department stores are prime back-to-school shopping destinations, and those industry groups combine for nearly 32 percent of XRT's weight. Alone, apparel retailers are 25 percent of the ETF's lineup. So, although XRT is an equal-weight ETF, meaning a single stock doesn't determine the fund's fortunes in either direction, short sellers' enthusiasm for apparel retailers is still notable as it pertains to XRT.

“While some shorts closed out their positions in the subsequent two weeks post-election, the current average short interest across retailers heading into Black Friday is still marginally higher than the levels at the same time last year — indicating that faith in the rally is still tenuous,” added Markit.

Of the 20 retail stocks with the largest percentage of their shares on loan to short sellers, several are among the nearly 100 stocks found in XRT.