It has not been a bad year for the low-growth consumer staples sector, particularly when considering the group’s lethargy early in 2014.
Popular market capitalization-weighted consumer staples exchange traded funds are boasting year-to-date returns north of 7% or close to 8%. However, there are alternatives to the traditional when it comes to staples ETFs. The First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG) proves that despite all the controversy surrounding the phrase smart beta, it (or strategic beta or alternative indexing) can certainly work at the sector level. [Don’t Hate Smart Beta ETFs]
FXG finished modestly lower Thursday, but the ETF is still up 11.5% year-to-date, a gain that soundly outpaces those offered by cap-weighted staples rivals and the S&P 500.
The drivers behind FXG’s out-performance are easily identifiable. While more goes into First Trust’s AlphaDEX series than an emphasis on smaller stocks or value names, the median market value of FXG’s 37 holdings is just $14 billion, which is significantly lower than cap-weighted staples ETFs. [AlphaDEX ETFs Drive First Trust’s Growth]
The other (and accurate) way of looking at FXG is that the ETF has benefited from the long-standing out-performance of mid-caps relative to broader U.S. indices. By not being heavily allocated to the most popular staples names, such as Procter & Gamble (NYSE: PG), Coca-Cola (NYSE: KO) and General Mills (NYSE: GIS), FXG is able to offer more of a growth feel to a sector more associated with value over growth.
Along those lines, FXG’s top holdings include names such as Constellation Brands (NYSE: STZ), which is up nearly 26% this year. Other noteworthy holdings of the ETF include hedge fund favorites Green Mountain Coffee (NasdaqGS: GMCR) and Herbalife (NYSE: HLF). Green Mountain, FXG’s ninth-largest holding at a weight of 3.7%, is up a tidy 78% this year.
The three aforementioned stocks along with several other prime holdings in FXG are usually lightly represented in or not at all held by traditional staples ETFs.
There is no denying FXG’s growth feel has proven alluring with investors. The ETF has added $354 million of its almost $1.4 billion in assets under management just this year.
Still, investors expecting the usual plain-vanilla staples ETF should remember that is not what they are going to get. That is not a negative, but it is a reminder that FXG’s stellar long-term returns are not a free lunch in the volatility department. FXG’s underlying index, the StrataQuant Consumer Staples Index, has easily topped the S&P 500 Consumer Staples Index over the past three years, but over that time FXG’s standard deviation is more than 400 basis points higher than the cap-weighted staples index, according to First Trust data.
First Trust Consumer Staples AlphaDEX Fund
