Retail ETFs Rebound, But Shorts Still Smell Blood

After spending a significant portion of this year lagging the broader market and the consumer discretionary sector, retail stocks and the corresponding exchange traded funds are rebounding.

The SPDR S&P Retail ETF XRT is up 5.6 percent year-to-date, which lags the S&P 500. However, over the past three months, the widely followed retail ETF is higher by 13.3 percent, a showing that easily tops the S&P 500 and traditional consumer discretionary ETFs.

Previously drags on the retail space and XRT some apparel and department store operators are igniting the sector's recent rally, but data indicate that isn't keeping short sellers at bay. In fact, with the back-to-school shopping period here, some short sellers appear emboldened when it comes to retail stocks.

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“US short sellers have been covering their positions so far in Q3, but the apparel retail sector has seen short interest increase heading into the key back to school shopping period,” said Markit in a recent note. “US apparel retailers now 15% more shorted than the previous back to school shopping period.”

Apparel retailers and department stores are prime back-to-school shopping destinations and those industry groups combine for nearly 34 percent of XRT's weight. Alone, apparel retailers are 25.5 percent of the ETF's lineup. So although XRT is an equal-weight ETF, meaning a single stock doesn't determine the fund's fortunes in either direction, short sellers' enthusiasm for apparel retailers is still notable as it pertains to XRT.

Department stores are struggling, too, as recent earnings from Macy's Inc. M and Nordstrom Inc. JWN confirm. Both stocks are members of XRT's lineup and Markit data suggest Nordstrom is a favored target of short sellers.

“The US ‘back to school’ shopping period is second only to the December holiday shopping period in terms of contribution to retailers’ yearly revenue totals. This year’s back to school timeframe could prove doubly important for the US apparel and broad-line retail sector, which has experienced a marked jump in short interest from the same time a year ago,” said the research firm.

Although back-to-school shopping is pivotal for retailers, its historical impact on broader consumer discretionary ETFs is mixed. For example, the Consumer Discretionary Select Sector SPDR XLY is usually one of the two worst sector SPDR ETFs in August before becoming one of the two best in October.