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Will Wal-Mart Drag Down Consumer ETFs?

Will Wal-mart Drag Down Consumer ETFs?
February 18, 2013

Retail giant Wal-Mart (NYSE:WMT) is off to its worst start in seven years and American consumers are spending less money. The pinch of higher payroll taxes, which began on Jan.1, 2013 is already translating into less spending.

Here’s what Jerry Murray, Wal-Mart’s vice president of finance and logistics wrote in an internal email obtained by Bloomberg news:

 “In case you haven’t seen a sales report these days, February month-to-date (MTD) sales are a total disaster. The worst start to a month I have seen in my ~7 years with the company.”

Wal-Mart along with 42 other stocks including Procter & Gamble, Coca-Cola, and Costco, is part of the Consumer Staples SPDR ETF (NYSEARCA:XLP).  

Among the 386 companies within the S&P 500 that reported Q4 2012 earnings, 81% of consumer staples have beaten earnings estimates, according to FactSet Research. However, based upon current earnings estimates, Q1 2013 earnings for the entire S&P 500 are down -0.04%.

Consumer discretionary (NYSEARCA:XLY) and consumer staples (NYSEARCA:XLP) are the two ETFs that carve out consumer focused stocks within the S&P 500 (NYSEARCA:SPY). Combined together, both XLP and XLY account for 22.26% of the S&P 500’s equity exposure.

As we wrote to readers in the March 2013 edition of the ETF Profit Strategy Newsletter, the American Tax Payer Relief Act of 2012 has nothing to do with genuine tax reform or relief. Unlike before, Americans now pay 2% in Social Security taxes on their first $113,700 in income. For a person making $40,000 per year, this means$780 of lost wages.

Furthermore, taxes were increased to a top rate of 39.6% for individuals earning $400,000 a year and $450,000 for couples. “This will inevitably translate into less consumption and less discretionary spending.”

For a family earning $50,000 the tax bite is equal to a basket of groceries every single month, according to Wal-Mart’s analysis.

XLY and XLP have both gained just over 7% in value since the beginning of the year.

Meanwhile, rising gasoline prices are another negative trend. The average price for a gallon of regular gas nationwide has rise from $3.30 in January, to $3.52 today, according to AAA.

ETFs like the ProShares UltraShort Consumer Goods ETF (NYSEARCA:SZK) are designed to increased 200% daily, when consumer stocks decline.

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CommentsAdd Comment

Ron the Editor said on May 12, 2013
  Hi Jefois,

You'll be hard pressed to find a consumer/retail focused ETF that doesn't include Wal-Mart. Even smaller emerging market focused consumer ETFs like ticker EMDD and ECON have exposure to Wal-Mart. What you're looking for is a consumer ETF ex-Wal-Mart, but unfortunately it doesn't exist.

Take care,
Ron the Editor
Jefois said on May 12, 2013
  Does anyone know any consumer ETFs that do not include Walmart in their holdings? I refuse to support that monstrosity of a corporation.
Michael said on February 20, 2013
  I think other retailers such as Target and Macy's may be a better indicator of what's going on in the retail sector. I'm afraid WalMart may be dragged down artificially because a lot of people just don't LIKE WalMart's business model and their screw America and its employees mentality.
Ken said on February 19, 2013
  Theopening sentence of the above article only mentions the increase in payroll taxes. What about the incerase in electric bills (40% in the last three years) and the price of gasoline which has increased 76% in the past three years? You don't think that these items are having a dramatic affect on all consumers? Wake up and smell the coffee, if you can afford to brew a cup, the economy is in a downward spiral. Ah, you say the stock market is doing fine... as long as the FED keeps printing money the stock market will flurish since mose institutional investors, such as banks, can borrow money at no cost and then pump up stock market purchases and shortly afterwards the purchases take their profits and then repeate the cycle over and over. The government is mismanaging our economy and we are all paying (no pun intended) the price.
BakerGirl said on February 18, 2013
  How can Walmart decrease its prices any further? If most of the garbage they sell is already on sale how can they discount things a little more? The retail business is a tough nugget too dependent upon the fickle ways of consumers. Better to invest in other sectors IMHO.
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