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XLP

A Defensive Sector ETF for Volatile Summer Months

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While many opt to "sell in May and go away," investors who stick around may be better off rotating into more conservative picks, such as consumer staples and sector-related exchange traded funds.

For instance, the Consumer Staples Select SPDR (NYSEArca: XLP ) tries to reflect the performance of the Consumer Staples Select Sector Index, which is comprised of consumer staples stocks taken from the S&P 500 Index. The fund includes a broad range of consumer stocks, including 23.4% food & staples retailing, 21.2% beverages, 19.2% household products, 18.2% food products, 16.6% tobacco and 1.3% personal products.

The sustainable nature of the consumer staples sector could help investors weather a potential storm in the summer months. Since April 30, 1945, the S&P 500 rose in price an average 1.4% from May through October, compared to an average 6.8% from November through April, writes Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, in a research note.

However, Sam Stovall, a S&P Global Market Intelligence equity strategist, pointed out that investors would be better off rotating to more defensive sectors of the S&P 500 index, like consumer staples, noting that the sector rose an average 4.6% in the May through October period since 1990 and outperformed the S&P 500 70% of the time, the most of any of the 10 GICS sectors.

"We think as investors look to the more defensive sector, XLP is a top ranked ETF worthy of additional scrutiny," Rosenbluth said.

Specifically, XLP shows a beta of 0.74 relative to the S&P 500 index - a 1 reading indicates a security with move with the market, but a lower beta implies the security is less volatile than the market.

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Capital IQ also argues that investors should stay invested in equities as currency pressures moderate ahead - the depreciating U.S. dollar will help bolster U.S. companies' revenues from overseas markets. According to Capital IQ, third and fourth quarter 2016 growth is expected to be 6.3% and 9.7%, respectively.

S&P Global Market Intelligence equity analyst Joseph Agnese also projects revenue growth will be sustained by improved pricing power as companies expand market and R&D budgets. Additionally, cheaper commodity costs and increasing efficiency will help support operating margin expansion.

The consumer sector is currently one of the better performing areas of the market. XLP increased 4.1% year-to-date while the S&P 500 rose 1.7%. The ETF is also trading above its 50-day and 200-day simple moving averages.

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Consumer Staples Select SPDR

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 was provided by our partner Tom Lydon of etftrends.com.


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

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