The investing scenario in the United States is a little tricky now. Upbeat economic fundamentals have encouraged the Fed to adopt a tighter monetary policy, which in turn has resulted in a stronger dollar and rising Treasury bond yields. This has weighed on the stock market. The S&P 500 has lost about 5.2% in the past month (as of Oct 19, 2018) (read: 5 Defensive ETFs to Survive Global Market Rout ).
In fact, 2018 has been all about rising rates. Though trade tensions kept a check on the fast ascent of U.S. treasury yields in the July-August period, yields started rising starting mid-September. Benchmark U.S. Treasury yield was 3.20% on Oct 19, up from 2.46% at the start of the year.
With rising rate worries weighing on the broader equity market, investors might think rate-sensitive sectors like consumer staples and utility will underperform. These sectors are high-yielding in nature but rising treasury yields usually deals a blow to high dividend-paying stocks. But contrary to the trend, these sector ETFs have been doing pretty well.
Why Defensives Rule?
September has been all about trade tensions, mainly between the United States and China, rising rate worries in the United States and currency crisis in emerging markets. Naturally, safe havens were sought by investors.
Investor should note that Goldman Sachs Group noted that equities have aided U.S. economic growth so far but that's likely to back pedal soon. Goldman estimated about 0.5 percentage point boost from higher equity prices to GDP growth at the start of the year while the research house cuts equity benefit to minus 0.25 percentage point for the next year . This has bolstered the need for safe investing of late (read: Consumer Staples ETFs Riding High on Trade War Fears ).
Moreover, several high-flying sectors like consumer discretionary and technology underwent correction in the past month due to overvaluation concerns. For example, Consumer Discretionary Select Sector SPDR ETF XLY , which is up 6.1% this year, has retreated 8.8% in the past month. Meanwhile, the underperformer Consumer Staples Select Sector SPDR ETF XLP , which is down 3.3% this year, has gained about 0.9% in the past month. In fact, XLP attracted $129.3 million in assets this month against $808.4 million of outflows seen in XLY.
Also, according to equitylclock.com, consumer staples enjoys a seasonal tailwind till late November. U.S. consumer spending steadily grew in August. Consumer confidence soared to a new high in September, hinting at healthy spending during the upcoming holidays.
Against this scenario, we highlight a few consumer staples ETFs that have made solid returns on Oct 19 and may gain further if the current market doldrums continue (see all Consumer Staples ETFs here).
Consumer Staples Select Sector SPDR ETF XLP - Up 2.28%
Vanguard Consumer Staples ETF ( VDC ) - Up 2.17%
Invesco S&P 500 Equal Weight Consumers Staples ETF ( RHS ) - Up 1.54%
First Trust Consumer Staples AlphaDEX ETF ( FXG ) - Up 1.54%
iShares US Consumer Goods ETF ( IYK ) - Up 1.17%
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