"Just Getting By:" Consumer Staples ETFs


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When people are "just getting by," consumer staples ETFs are great investments. "Getting by" means staying in place rather than expanding. It may mean surviving on less income and a smaller budget. Consumer staples ETFs are funds that hold manufacturers and marketers of products that won't be cut from the budget. Foods and beverages, drugs, tobacco and household products are basic necessities that consumers continue to need, just to get by.

There are several good and reasonably priced consumer staples ETFs. The best established is the Consumer Staples SPDR (NYSEArca:XLP). XLP was the first consumer staples ETF to market. It has attracted over 2 billion in capital. XLP has a low expense ratio and low turnover. Coca Cola (NYSEArca:KO), Pepsi (NYSEArca:PEP), Kraft Foods (NYSEArca:KFT), Philip Morris (NYSEArca: PM), Walmart ( WMT ), and Proctor and Gamble ( PG ) are major holdings.

According to the Department of Labor, consumers spend over 16% of their budget on food, alcoholic beverages, tobacco, and personal care. After housing and transportation, outlays for food are larger than any other consumer spending category, and are less discretionary. Consumers can downsize their home and hold off on the purchase of a new car. Downsizing the food bill is more difficult and purchasing food is essential.

Consumer staples ETFs have outperformed the benchmark on a three-year and a five-year basis. The two charts below show this. They compare staples fund XLP with the domestic benchmark Standard and Poor Depositary Receipts (NYSEArca:SPY) which tracks the ubiquitous S&P 500 Index.

As the charts show, XLP has been a strong performer, beating the SPY by 10% over three years and 30% over five years. Despite this strength, XLP is currently cheaper than the benchmark in terms of earnings. XLP currently sports a P/E ratio of 14, as compared to 16 on the SPY. XLP also offers a higher yield when compared to the SPY. In fact, current yields on XLP are higher than on the ten-year treasury note. At this level consumer discretionary funds like XLP are a natural place for investors to turn for safety-- and income.

A good alternative to XLP is the Vanguard Consumer Staples ETF (NYSEArca:VDC). VDC tracks the performance of the MSCI U.S. Investable Market Consumer Staples index. It has a slightly higher expense ratio and higher turnover than XLP, but the two funds post very similar returns and are functionally identical.

Although investors look to the consumer staples sector primarily for stability, there may be a growth story here too. The large cap holdings that make up the most of XLP and VDC derive substantial income from outside of the U.S. The largest holding P & G, for example, gets almost 60% of its revenue from overseas, half of that from emerging markets. Another key holding, Philip Morris, is entirely outside the U.S. Overseas, an emerging middle class is creating new demand for high quality staples that will benefit these names. According to World Bank data, 290 million people in China, 91 million in India and 58 million in Brazil in this emerging middle class category. Although the numbers vary, in poorer societies, families tend to devote a greater percentage income to staples. Expenditures on food and staples may be 50% or more of total expenditures.

In addition to the plain vanilla consumer staples ETFs like XLP and VDC, several fundamental funds seek to beat the standard indexes. These funds take a strategic approach to staples allocation. They typically allocate more to mid-cap names than XLP or VDC. As a result, First Trust Consumer Staples AlphaDEX Fund (NYSEArca:FXG), Powershares Dynamic Consumer Staples Sector Portfolio ETF (NYSEArca:PSL), and Rydex S&P Equal Weight Consumer Staples ETF (NYSEArca:RHS) tend to be more volatile. They have higher expense ratios and usually higher turnover. FXG for example has an expense ratio of 0.70% and an annual turnover of close to about 170%. RHS is an equal weight fund. Its expense ratio is 0.50% and an annual turnover of 25%. PSL comes in at 0.65% with an annual turnover ratio of 67%. These are not necessarily unreasonable expenses ratios. It may be worth paying up for this allocation. All are lower than typical mutual funds in this category.

For investors looking to overweight food, PowerShares Dynamic Food & Beverage (NYSEArca:PBJ) puts a special focus on companies like General Mills ( GIS ) and Heinz (NYSE:HNZ), rather than the broad-based staples ETFs mentioned above. Though PBJ has a higher expense ratio, this as an attractive option for investors looking for a strong subsector fund.

Investors looking for international exposure should consider iShares S&P Global Consumers Staples Sector Index Fund (NYSEArca:KXI). KXI adds in companies not listed on the U.S. exchanges, like British American Tobacco and Swiss food and drink giant Nestle.

Following are Consumer Staples ETFs and their expense ratios:

Consumer Staples Select Sector SPDR Fund (NYSEArca:XLP), 0.22%

First Trust Consumer Staples AlphaDEX Fund (NYSEArca:FXG), 0.70%

iShares S&P Global Consumer Staples Sector Index Fund (NYSEArca:KXI), 0.48%

PowerShares Dynamic Consumer Staples Sector Portfolio ETF (NYSEArca:PSL), 0.65%

SPDR S&P International Consumer Staples Sector ETF (NYSEarc:IPS), 0.50%

Vanguard Consumer Staples ETF (NYSEArca:VDC), 0.25%

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: FXG , GIS , IPS , PG , WMT

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