To trade a recession: Shorting retail

Six ways from Sunday

Philip Valenta, MSF
Sep 2, 2019 · 3 min read
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Empty shopping carts await customers at a Costco near you. Photo courtesy of Christina Cantwell.

alk of recession in the United States (and elsewhere) is only increasing. Like a mite that burrows ever deeper once it breaks the skin, it’s perceived inevitability seems to be gaining momentum. Yet, money can be made in any market, up, down, or sideways; it’s only when a market ceases to exist altogether that the opportunity to profit from it disappears. Given that, one particular security looks ripe for shorting in the event of an oncoming recession: XRT, State Street’s SPDR® S&P® Retail ETF.


  1. Businesses in the retail sector of the American economy are unlikely to be bailed out by the federal government in the event of a financial crisis, unlike major banks or manufacturers. One can review the ’08 crash for evidence of that.
  2. Consumerism historically takes a disproportionate hit in times of trouble, especially where it comes to big ticket items.
  3. An impending recession is only an additional headwind retail companies may face, not the entire story. The industry has already been shaken up by things like the Amazon effect, and, as of today, will begin to feel the hurt of tariffs from Trump’s trade war with China. In other words, the sector as a whole is already in an increasingly weakened state, with some players now truly reeling from the blows they’ve heretofore received. A recession could mean a “knockout — goodnight!” for many.

Portfolio-wise, XRT’s holdings include juggernauts Amazon, Target, and Walmart, sure, but also some 80+ other stores, more than a few of which have been struggling, to put it lightly. These count the likes of Nordstrom, Gap, MarineMax, Chico’s, and Party City among their ranks, and the party might just be winding down.

In the fund’s own words, XRT

~ Seeks to provide exposure the retail segment of the S&P TMI, which comprises the following sub-industries: Apparel Retail, Automotive Retail, Computer & Electronic Retail, Department Stores, Drug Retail, Food Retailers, General Merchandise Stores, Hypermarkets & Super Centers, Internet & Direct Marketing Retail, and Specialty Stores

~ Seeks to track a modified equal weighted index which provides the potential for unconcentrated industry exposure across large, mid and small cap stocks [emphasis mine]

With the above in mind, apparel is quite vulnerable at this time, as are department stores, many specialty retailers, and any company that deals in generally expensive durable goods such as vehicles. Meanwhile, the fund is tasked with providing “unconcentrated industry exposure across large, mid and small cap stocks.” That means it will continue to hold a proportional amount of losing equities, decreasing in value along with them until those companies go out of business or otherwise make an exit.

To me, the question of a downturn in retail is one of timing, not probability. As things stand, a recession isn’t required for retailers to further feel the burn, but it will help to push several over the edge. At any rate, the chips are currently stacked against the sector, although it all may still take a hot minute to shake itself out. Hence, if you choose to pursue such a play, I would suggest long-dated put options (LEAPS) as far out as you can go (January of 2021, as of this story’s publication), or having sufficient margin to sell the fund short over a period of time.

That being said, there are no sure things in this life. Plan accordingly, and may you have success in your trades, whatever they are.

*The above is offered for informational purposes alone, and is not to be construed as investment advice. In other words, unless I was there with a hand on your throat when you entered the trade, I didn’t make you do it.



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