The Case for Consumer Staples ETFs

February 7th at 2:00pm by Tom Lydon

Exchange traded fund (ETFs) have made getting your exposure to various sectors easier than ever. It’s an especially big advantage when you consider the strength of the consumer staples sector these days.

Stocks in the consumer staples category have the most market value allocated to the best companies, explains David Trainer for Forbes. [Emerging Markets Boost Consumer Staples ETFs.]

Kelly Campbell for U.S. News & World Report notes that there are several reasons to think about having this sector in your portfolio this year:

  • Recovery: Let’s face it: though things have certainly gotten better, the U.S. economy isn’t exactly 100%. Joblessness at 9% is still high and layoffs are still happening; such jitters can keep even those Americans with jobs nervous enough to hold off on big, frivolous purchases.
  • Inflation: Consumer staples companies are best-suited to withstand the recent commodity price increases. That’s because many of these companies have increased internal efficiencies within their organizations, and they have also reduced portions without reducing prices. While you may not know it, your cereal boxes have gotten smaller, but you’re paying the same price per box.
  • Dividends: The manufacturers of these consumer goods are in such good shape that they have been buying back stock and increasing their dividends. This sector is known for dividend payouts and even increasing dividends.
  • Stability: We still have high unemployment and a crippled economy, which makes these stable stocks a safe haven for investors. Everyone wants stability, and there is safety in staples. This sector is made up of items we need and use daily, and we won’t stop buying those items just because money is tight. [5 Sector ETFs To Consider For 2011.]

Before you go jumping into any consumer staples ETF, it is important to evaluate the choices, as not all of these funds are created equal. Consumer Staples Select Sector SPDR (NYSEArca: XLP) was the only consumer staples sector ETF to rank better than the overall sector, as the risk/ reward of the allocations are favorable.

First Trust Consumer Staples AlphaDEX (NYSEArca: FXG) is another good bet and one of the strongest performers in the consumer staples class. Its holdings are more evenly distributed, with Archer-Daniels-Midland (NYSE: ADM) being the largest at 5.5%, while XLP’s top three holdings are one-third of the fund.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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