By
Morningstar
:
By Robert Goldsborough
Consumer Staples Select Sector SPDR (
XLP
)
is the lowest-priced and most liquid exchange-traded fund for broad
exposure to a basket of defensive, mega-cap consumer discretionary
names. As investors become increasingly concerned about potentially
chilly economic winds ahead that could affect more discretionary
consumer spending, they might want to consider this ETF, which
holds the 41 consumer staples firms that are contained in the
S&P 500 Index.
Investors seeking explosive growth are better suited looking
elsewhere, as this ETF is chock-full of mature businesses offering
relatively stable returns and a clear tilt toward large-cap names.
While investors shouldn't expect much higher than mid-single-digit
top-line growth from these mature firms, XLP does offer a decent
dividend yield.
This is a high-quality, market-capitalization-weighted
portfolio, with some 62% of assets invested in wide-moat firms.
Another 31% of assets are invested in companies that are deemed to
have narrow economic moats. (Morningstar's equity analysts define
economic moats as durable competitive advantages.)
XLP probably makes best sense for investors seeking a defensive
portfolio tilt. Not surprisingly, consumer goods companies--such as
Procter & Gamble (
PG
), Philip Morris International (
PM
), and Coca-Cola (
KO
)--dominate the portfolio. XLP also holds a slew of
nondiscretionary retailers included here, such as Wal-Mart (
WMT
) and Kroger (KR). Asset allocators also might consider that the
fund has been 85% correlated with the S&P 500 over the past
five years.
Fundamental View
The cap-weighted structure of this ETF translates into relatively
concentrated exposure to a few noncyclical consumer staples
behemoths. For instance, the fund's top three holdings alone
account for more than 35% of total assets, and its top 10 holdings
comprise more than 69% of assets. Also worth noting is that about
78% of assets are allocated to consumer goods firms, with the
remaining 21%-plus invested in nondiscretionary retailers.
XLP is a defensive holding because consumers buy toilet paper,
razors, bandages, and baby food regardless of the economic climate.
The fortunes of defensive consumer companies such as Kraft (KFT)
and Colgate-Palmolive (CL) generally depend less on roaring
economies than do other more discretionary consumer sectors--such
as travel and leisure, for instance. The news has been decent on
the demand side for many consumer companies, with continued solid
consumer spending. Reports show that consumers are continuing to
spend, despite concerns about future inflation, higher fuel prices,
and still-high unemployment. However, no one disputes that consumer
spending could change--and more consumer discretionary-oriented
names could get hammered--in a hurry, particularly if consumers
close their pocketbooks owing to generally weak consumer sentiment,
largely flat incomes and still-high unemployment (including minimal
job growth at best). A fund like XLP, on the other hand, should
expect relatively stable demand regardless of the economic
climate.
Morningstar's equity analysts project only low- to
mid-single-digit top-line growth for these mature firms over the
next five years. So, while these firms may offer something of a
safety net during difficult economic periods, investors shouldn't
pile in with the expectation for exceptional growth during a
cyclical upturn.
One potential headwind for companies in this fund is commodity
prices. Many of XLP's companies are voracious consumers of
commodities. Thus, we think investors should be cognizant of
volatility in raw material costs as they consider whether to
invest. However, regardless of where commodity prices go, investors
should remember that we anticipate these mature firms to post
long-term GDP-type top-line growth. Therefore, at the end of the
day, investors with strong convictions related either to currency
markets or commodity prices should consider their stances (and the
impact on these businesses) before diving in.
Fees
The fund's 0.18% expense ratio is low even by ETF standards. It
also is the lowest expense ratio of any ETF in its space.
Alternatives
Investors seeking nondiscretionary exposure to the consumer have
plenty of choices in the ETF world. In our view, the most similar
alternative to XLP is the smaller and less liquid Vanguard Consumer
Staples (VDC) (0.19% expense ratio). Even though XLP owns only 41
stocks versus the 108 companies that VDC holds, the two funds show
performance that has been almost perfectly positively correlated
over the past five years (99%). In terms of assets under management
and average daily trading volume, XLP dwarfs VDC. Thus, large
institutional investors who demand deep liquidity in order to move
in and out of positions without having a market impact might favor
the greater liquidity of XLP or might considering working with an
ETF liquidity specialist. However, in our view, VDC still offers
sufficient liquidity for individual investors.
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