Shorts Continue Targeting Retailers

Investors have seen this movie plenty of times already this year. The SPDR S&P Retail ETF (NYSE:XRT), previously seen as the benchmark among exchange-traded funds tracking retail stocks, is getting punished as markets take traditional brick and mortar retailers to task.

Even with all of its struggles, and there are plenty, XRT has traded higher over the past week and month and is down just 7.4 percent year to date. That speaks to some of the advantages of XRT's equal-weight methodology, which helps limit single stock risk.

However, with XRT down just 7.4 percent this year, that is not enough for bearish traders to say the easy money has already been made. In fact, short sellers continue targeting XRT and some of its holdings, along with other retail stocks.

The Data Say...

Data confirm the bearish cloud hovering over XRT and some of its components.

S&P 500 short sellers, already disproportionally active in retailers, are gearing up for more disappointment from the sector this earnings season, said Markit in a note out Wednesday. The sectors very evident struggle against online rivals has already caused its shares to trail the wider S&P by 20% year to date. Efforts to head off this competition by aggressively closing down stores and investing heavily in omnichannel distribution has so far left shorts unconvinced; demand to borrow the sectors shares continues to climb ever higher. This relentless buildup of shorting activity means that the average short demand for the sector now stands at 5.2% of shares outstanding, the highest level in over two years.

On a related note, XRT is currently one of the most shorted US-listed ETFs, a dubious distinction held by the ETF for a good portion of 2017.

As Markit points out, short sellers have been active in department store names, such as Kohl's Inc. (NYSE:KSS) and Nordstrom, Inc. (NYSE:JWN). XRT allocates 7.6 percent of its weight to department store stocks.

It's Better Online

Not all retailers are flailing. E-commerce firms, and that includes more than just Amazon.com Inc. (NASDAQ:AMZN), are thriving. Just look at the Amplify Online Retail ETF (NASDAQ:IBUY). IBUY is up 36.1 percent year-to-date and is regularly hitting new highs while XRT flails.

The negative sentiment expressed by short sellers is mirrored by ETF investors, who have continued to cash out of retail focused funds over the last four months. These investors were initially willing to give the retail sector the benefit of the doubt, because retail ETFs experienced their first quarterly inflow in two years over the first quarter, according to Markit.

In the third quarter, investors have yanked $90.5 million from XRT while allocating $16.2 million to IBUY.

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