Defend Your Portfolio with Consumer Staples ETFs
June 21st 2012 at 8:00am by Tom Lydon
Bullish traders are already eschewing safe-haven assets in favor of risky equity plays, but for those who are still wary of a market pullback, consumer staples exchange traded funds are a low-risk way to dip one’s toes into stocks.
For example, Consumer Staples Select Sector SPDR (NYSEArca: XLP) tracks large and stable brands like Procter & Gamble (NYSE: PG), Coca-Cola (NYSE: KO), Philip Morris (NYSE: PM) and Wal-Mart (NYSE: WMT). The fund covers all the non-cyclical plays like food & staples, beverages, household products, tobacco, food products and personal products.
XLP has gained 2.4% over the past three months. In comparison, SPDR Consumer Staples Discretionary Select Sector Fund (NYSEArca: XLY) has lost 1.4% over the last three months as the markets faltered on Eurozone debt worries. XLY is more sensitive to shifts in sentiment and the economy than the consumer staples ETF.
This defensive staples sector is often favored in tough times for the economy because the companies’ products are necessities.
“XLP is a defensive holding because consumers buy toilet paper, razors, bandages, and baby food regardless of the economic climate,” according to Morningstar analyst Robert Goldsborough.
“The news has been decent on the demand side for many consumer companies, with continued solid consumer spending. Reports show that consumers are continuing to spend, despite concerns about future inflation, higher fuel prices and still-high unemployment,” Goldsborough said in a research note.
Additionally, XLP offers a decent dividend payout of 2.67%, compared with 2% for the iShares S&P 500 (NYSEArca: IVV).
Paul Atkinson, Aberdeen Asset management’s head of North American equities, points to the balance sheets of a number of defensive blue-chip firms are the strongest they have been in 50 years, reports Kyle Caldwell for Investment Week. Consequently, Atkinson believes this will result in higher dividend growth over the next couple of years.
“Over the last six to 12 months there has been a realization that U.S. companies have got an enormous amount of cash on their balance sheets, which will result in higher dividend growth over the short and long term,” Atkinson said in the article.
For more information on the consume staples sector, visit our consumer staples category.
Max Chen 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.