Consumer ETFs Allure as Investors Play Defense

  • XLP is one of best-performing consumer staples ETFs on a year-to-date basis with gain of nearly 2%
  • Overall, consumer staples space – notably food companies – are experiencing slower growth
  • With investors playing defense, XLP and rival ETFs have new found allure

In a year in which investors have prized defensive, low volatility assets and sectors, it’s not surprising that the Consumer Staples Select SPDR (NYSEArca: XLP) is one of the best-performing sector exchange traded funds on a year-to-date basis with a gain of nearly 2%.

XLP’s bullishness this year is a reversal of fortune from late 2015. XLP and rival staples ETFs had their hands full with rising rate-related issues. For example, several of the largest staples names have reported lackluster earnings, blaming the strong dollar for weak overseas currency conversions.

“Margins appear to be getting squeezed this year, and the strong USD isn’t helping things by acting as a headwind to revenue growth from abroad, resulting in a forecast decline in EPS this year. Estimates for next year look better. In any case Consumer Staples stocks have seen their P/E multiples expand considerably over the last five years. As a result these stocks appear rather expensive, and Staples has an UNDERWEIGHT recommendation,” according to AltaVista.

There are other issues to consider as well. The consumer staples space, notably food companies, is experiencing slower growth. According to FactSet, quarterly revenues for companies on the food-products index declined 10.5% year-over-year, with 57% of companies having reported.