Consumer staples used to be seen as a recession-proof sector that could withstand any downturn. But the consumer staples sector has lagged in this recession. How have the related exchange traded funds (ETFs) managed to stay afloat?

Shoppers might not be able to afford Rolex watches and champagne during a downturn, the theory ran, but everyone still needs staples such as soap and toilet paper, explains the Economist.

So why have sales fallen in this category? One big factor is growing competition from stores’ own brands, or “private labels.” Private-label goods tend to cost about a quarter less than branded ones, and so they appeal to penny-pinching consumers. The rising commodity prices have also put a damper on the sector at large, as consumers have simply redefined what’s really a “staple” for them.

Analysts are forecasting the change to private-labels is a trend that could stick, whether the recession is here or not. The quality of private-label goods has improved, making it harder for consumers to discern any difference between a store’s brand and a more expensive rival.

How can you play the shift from name-brand to generic? Look for ETFs that hold stores with private labels, such as Target (TGT), Wal-Mart (WMT) and CVS (CVS).

  • Consumer Staples Select SPDR (XLP): up 5.6% year-to-date; holds Wal-Mart, 11.7%; CVS, 5.1%

  • Vanguard Consumer Staples (VDC): up 7.8% year-to-date; holds Wal-Mart, 11.2%; CVS, 4.2%

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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.