Skip to Content
Fund Spy

Funds Betting on Discount Retailers

This is one of the few industries that has benefited from the downturn.

Mentioned: , , , , , , , , ,

Amid the horrendous market downturn of recent months, one industry that has escaped most of the carnage is discount retailers. As the economy has steadily worsened, makers of big-ticket items such as cars have seen their sales fall shaply, while sales at discount retailers such as  Wal-Mart (WMT) and  Costco (COST) have mostly remained relatively solid, as consumers tighten their belts and "trade down" to buy cheaper things. These retailers haven't been totally immune to the effects of the weak economy, but they've held up much better than most industries. Of the 129 industries that Morningstar uses to classify stocks, discount stores has been the best performer so far in 2008, led by the double-digit gains of Wal-Mart.

You might think that funds with big stakes in this relatively robust industry would be doing well in the current environment, and to a certain extent that's true. The two funds with the largest percentage of their portfolio in the discount stores industry are Rydex Retailing (RYRIX), at 31.14%, and Fidelity Select Retailing (FSRPX), at 18.08%; both are near the top of their categories (mid-cap growth and large growth, respectively) for the year to date. In fact, of the 10 funds with the largest such stakes, seven are specialty funds focused on retail and/or consumer staples, and five of these rank in their category's top decile so far this year--the two previously mentioned plus Vanguard Consumer Staples Index (VCSAX), Fidelity Select Consumer Discretionary (FSCPX), and Fidelity Advisor Consumer Discretionary (FCNAX). The exceptions are ProFunds Consumer Services Ultra (CYPIX), a bottom-decile fund whose use of leverage has magnified its negative returns, and ICON Consumer Discretionary (ICCCX).

However, things are not quite so neat and tidy when we go beyond specialty funds. For one thing, several of the above are index funds dominated by Wal-Mart and other mega-cap retailers such as  Home Depot (HD) and  Lowe's (LOW), which have done far better than most retail stocks. (Wal-Mart, Home Depot, and Lowe's together account for more than 20% of Rydex Retailing's portfolio.) Several others focus more broadly on consumer stocks, a group that includes some hard-hit names but also relatively strong performers such as  McDonald's (MCD) and  DeVry (DV). Some diversified funds with big discount retailer stakes have stuck with such safe fare and avoided blowups, but quite a few have not.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.