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 (
), and Proctor and Gamble (
) 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
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 (
) 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
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
Following are Consumer Staples ETFs and their expense
Consumer Staples Select Sector SPDR Fund (NYSEArca:XLP),
First Trust Consumer Staples AlphaDEX Fund (NYSEArca:FXG),
iShares S&P Global Consumer Staples Sector Index Fund
PowerShares Dynamic Consumer Staples Sector Portfolio ETF
SPDR S&P International Consumer Staples Sector ETF
Vanguard Consumer Staples ETF (NYSEArca:VDC), 0.25%