Market Overview

Leveraged ETF Traders Are Betting Q4 Will Be Kind To Retail


To say the retail sector is currently downtrodden is a delicate way of stating the group's current state of affairs. The S&P Retail Select Industry Index, a popular, equal-weight gauge of retail stocks, is down about 7 percent year-to-date while the S&P 500 is up more than 14 percent and residing near record highs.


Predictably, what is bad news for the S&P Retail Select Industry Index is basically catastrophic for the Direxion Daily Retail Bull 3X Shares (NYSE: RETL). That ETF attempts to deliver triple the daily returns of the S&P Retail Select Industry Index. Proving that leveraged ETFs should be held for extended time frames, RETL is overshooting the index on the downside with a year-to-date loss of about 26 percent. 

Top holdings in the index include Finish Line Inc (NASDAQ: FINL) (1.53 percent), Groupon Inc (NASDAQ: GRPN) (1.4 percent), and Tailored Brands Inc (NYSE: TLRD) (1.4 percent). 


Still, plenty of traders and investors believe the fourth quarter is usually kind to retail stocks, a belief that could put RETL in play over the coming months.


History As A Guide


With a couple of exceptions, 2017 has been a pretty rough year for retail investors,” said Direxion in a recent note. “Wall Street has continued to hit the sector amid the continued dominance of Amazon. And news of the company’s acquisition of Whole Foods and its planned expansion into brick-and-mortar sales hasn’t done much to quell that sentiment.” 


RETL's underlying index allocates over 17 percent of its weight to Internet retailers, the best-performing corner of the broader retail space this year. That has not been enough to counteract the almost 58 percent the benchmark devotes to specialty retailers, plenty of which are slumping this year.


“However, the prevailing negative sentiment doesn’t mean there isn’t an opportunity in the sector,” said Direxion. “If history is any indication, the fourth quarter could signal a change in price trends within the industry overall, helped by a few names in particular.”


Some Enthusiasm


RETL is down about 6 percent over the past month, but that is not keeping traders away. Over that period, the leveraged retail ETF is averaging daily inflows of more than $366,000, according to Direxion data


Last year, RETL's index surged from November through December after slumping late in the third quarter and to start the fourth quarter.


RETL is also well-positioned because of its holdings. With the exception of Sears, most of the fund’s top holdings are in specialty retail (56 percent of the index, to be exact) which has proven more resilient against Amazon than big-box stores with massive amounts of inventory,” adds Direxion.


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