Wal-Mart (WMT), the world’s number one
retailer, is finding itself in hot water once again with the
general public, this time due to bribery allegations among the
firm’s Mexican operations. It has been alleged that the giant was
engaged in a scheme over multiple years which may have totaled more
than $24 million to government officials in order to smoothly build
the company’s business in the populous Latin American country.
While the bribes are certainly a problem, the real concern
appears to be how extensive the knowledge of the payments were with
some speculating that even the CEO and CFO of Wal-Mart were aware
of the program. Additionally, there is also conjecture that the
payments could violate both the Foreign Corrupt Practices Act and
some Sarbanes Oxley rules and could thus result in severe penalties
for the retailer.
Beyond this issue, Wal-Mart has several other problems which are
not going away anytime soon. The firm is running out of growth
opportunities in the U.S. thanks to hostile city governments and a
populace that is uncertain over the costs and benefits of welcoming
the company inside their borders.
Furthermore, profit margins remain razor thin while a slowly
improving economy could push more consumers into higher-end
retailers, especially if job growth continues to come in a modest
pace (see Top Three Consumer Staples ETFs).
Yet these domestic problems pale in comparison to the damage
that the bribery issue could do to the firm’s international
operations. The mess could make other emerging markets less welcome
to Wal-Mart in the near future as well, possibly curtailing growth
rates in countries looking to promote more of a corruption fighting
image.
"Entering additional countries is a cornerstone of Wal-Mart's
growth strategy," Consumer Edge Research analyst Faye Landes wrote
in a research note. "We can foresee the authorities in some key
countries, notably India, becoming dramatically less welcoming to
Wal-Mart following the release of the allegations."
Furthermore, the company’s stock has had severe difficulty
breaking through the $62.5/share level which appears to be the top
for the company, at least in the short-term. In fact, WMT has
failed to close above $62.5 before retreating heavily on two
separate occasions so far in 2012 suggesting that this could be the
peak price for the firm unless the fundamentals change.
Thanks to these issues, some investors may want to avoid WMT, at
least in the short-term while these problems play out.
However, for ETF investors, this can be difficult to do in
the fund world, especially when looking at consumer or retail ETFs
(read Play A Consumer Recovery With These Discretionary ETFs).
This is largely due to the impressive size of Wal-Mart from a
market capitalization perspective; the firm is currently in the top
ten globally for market cap and is more than five times bigger than
rival Target. As a result, many of the top ETFs in the sector have
huge holdings in WMT including an 11.9% allocation to the firm in
the Market Vectors Retail ETF
(RTH).
Beyond this, the Consumer Staples Select Sector SPDR
(XLP) and the
Vanguard Consumer Staples Fund
(VDC) also allocate at
least 7% to WMT while a few others also give the company at least a
5% weight.
Fortunately, there are still a number of ETFs beyond these
listed above that can offer great exposure to the retail or
consumer spaces but can do so without putting so much into WMT.
This could be ideal given the uncertainty surrounding Wal-Mart and
the company’s uncertain path to growth in the domestic market going
forward.
For investors subscribing to this idea, any of the following
three consumer ETFs could make for better choices at this time:
SPDR S&P Retail ETF
(XRT)
For a focused play on the retail space, investors could consider
XRT for their exposure. The fund holds 95 components in its basket
and puts just 1.07% of its allocation to WMT (See more in the
Zacks ETF Center).
This low level of holdings in the retail giant comes about due
to XRT’s weighting strategy. Unlike many funds in the space which
utilize a market capitalization weighted approach, XRT uses an
equal-weight technique. This ensures that small companies receive
as much in holdings as their large cap counterparts, skewing the
fund towards pint sized companies.
For investors seeking to make a play on retail but to keep WMT’s
holding in check this could be an ideal way to go. Not only does
the product limit WMT’s influence, but the retail ETF sees high
levels of volume and AUM suggesting tight bid ask spreads as
well.
Guggenheim S&P Equal Weight Consumer Staples ETF
(RHS)
For a look at the broad consumer staples market instead, RHS
could be an intriguing choice for many investors looking to limit
their WMT exposure. The fund puts a very reasonable 2.3% of its
assets in the company, a level that is comparable to the other 42
stocks in this consumer ETF.
Once again, this is accomplished by using an equal weight
technique, following the S&P Equal Weight Consumer Staples
Index. With this approach, the fund has roughly 36% of its
portfolio in companies that are mid caps or smaller, while food
companies dominate the holdings from an industry perspective (read
Alternative ETF Weighting Methodologies 101).
Despite the fund’s broad focus on the consumer staples segment,
it hasn’t really caught on with investors so far. Volume is
generally below 10,000 shares a day while AUM is still trending
under $40 million. This suggests that the bid ask spreads will be
wider than other products on the list while the expense ratio of 50
basis points could only further add to the total cost of the
fund.
PowerShares Dynamic Consumer Staples Sector ETF
(PSL)
If one wants a more fundamental approach, PowerShares’ Consumer
Staples ETF could be a better pick. The ETF doesn’t use a market
cap weighting system either, instead weighting equally after
narrowing down the field to about 60 stocks. This is done by taking
into account various investment criteria including growth, value,
investment timeliness, and risk metrics (also see Three Great ETFs
For Your IRA).
With this process, the fund gives Wal-Mart an allocation of
about 2.6%, far below what market cap weighted funds usually assign
to WMT. Instead, a variety of food, food retailer, and
tobacco firms dominate the ETF from an industry perspective, giving
the product a retail tilt from a different perspective.
However, investors should note that the ETF, much like RHS, has
failed to obtain high levels traction in terms of AUM or volume.
Volume is below 5,000 shares a day and the market cap comes in
under $40 million, promoting wide bid ask spreads.
Additionally, the expense ratio is rather high—65 basis
points—thanks to the equal weighting and fundamental approach,
suggesting it may not be the cheapest way to play consumers without
too much focus on Wal-Mart.
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