Make Money in Promising Retail Stocks the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the retail industry to grow as our global economy eventually recovers, the PowerShares Dynamic Retail ETF (NYS: PMR) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The retail ETF's expense ratio -- its annual fee -- is a reasonable 0.63%.

This ETF has performed rather well, beating the S&P 500, on average, over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

What's in it?
Several of this ETF's components made strong contributions to its performance this year. Beleaguered drugstore chain Rite-Aid (NYS: RAD) , for example, is up 38% in 2011, perhaps in part due to its stock being heavily shorted. When a bunch of shortsellers decide to get out, their buying can boost a stock. Rite-Aid may also have benefited from the inability of Walgreen (NYS: WAG) and Express Scripts (NAS: ESRX) to come to an agreement over a pharmacy benefits management (PBM) contract.

Select Comfort (NAS: SCSS) saw its shares surge 136% so far this year, partly due to the effect of rising prices on profit margins and consumers liking its set-your-own-firmness mattresses. The company is bullish, noting that most consumers don't even know about it yet. Whole Foods Market (NAS: WFM) , up 36%, has been growing aggressively and benefiting from profit margins considerably higher than its peers. Its 3.4% net margin, for example, dwarfs Kroger's 1.3%. And while SUPERVALU (NYS: SVU) might have more than three times Whole Foods' revenue, its razor-thin profit margin puts it at a disadvantage.

Other companies didn't add as much to the ETF's returns last year, but could have an effect in the years to come. Walgreen, for instance, shed about 11%, selling its own PBM business for a lot of cash but also worrying investors by ending its dealings with Express Scripts.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn aboutthe best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these10 Stocks for Your Retirement Portfolio.

At the time thisarticle was published LongtimeFool contributorSelena Maranjianholds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Whole Foods Market and SUPERVALU.Motley Fool newsletter serviceshave recommended buying shares of Whole Foods Market and buying calls on SUPERVALU. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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