Market Overview

Prepare For Retail Retrenchment With This ETF

Prepare For Retail Retrenchment With This ETF

Consumer confidence, a primary indicator of U.S. economic health and one widely watched by equity market participants, remains healthy. The Conference Board's Consumer Confidence Index increased to 134.1 in May, up from 129.2 in April.

“The Present Situation Index – based on consumers' assessment of current business and labor market conditions – increased from 169.0 to 175.2,” according to the Conference Board.

What Happened

While consumer confidence looks sturdy, some market observers remain concerned the health of the U.S. consumer could surprise to the downside, putting some brick-and-mortar retailers at risk. The ProShares Decline of the Retail Store ETF (NYSE: EMTY) is an exchange traded fund to consider should consumer confidence become shaken.

EMTY is designed to deliver the daily inverse performance of the Solactive-ProShares Bricks and Mortar Retail Store Index. Although the fund is an inverse ETF, EMTY is up more than 2 percent this year and is easily outpacing the SPDR S&P Retail ETF (NYSE: XRT), a traditional retail ETF.

Why It's Important

Retail stocks got a lift earlier this week. As the broad market soared Wednesday, XRT slumped. On the other hand, EMTY gained 2.41 percent. There could be more upside to come for the ProShares ETF if some market observers' outlooks for the consumer prove accurate.

“While some investors may see this as a sign that it’s safe to start shopping again in this space, Miller Tabak’s Matt Maley says not so fast,” reports CNBC. “Based on the historical correlation between the stock market and consumer confidence, Maley argues consumer confidence may be about to dip, which could hit the retail space hard.”

What's Next

Eroding consumer faith, should that scenario arrive, would present an obvious near-term catalyst for a fund like EMTY, but the inverse retail ETF has some other compelling tailwinds that could lift the fund for lengthy periods.

More than being vulnerable to declining consumer confidence, the stocks in EMTY's underlying index are vulnerable to the ongoing ascent of e-commerce and online retail. Some of these companies are closing large amounts of physical stores while brick-and-mortar retailers are disappearing altogether as e-commerce companies pilfer market share from traditional retailers. Those are durable trends and set up well for EMTY as highlighted by the fund's nearly 13 percent gain over the past year.

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