As measured by the Consumer Staples Select Sector SPDR (NYSEArca: XLP), 2014 has been another decent year for the consumer staples sector, the sixth-largest sector weight in the S&P 500.
XLP, the larges consumer staples ETF by assets, is up 15.7% year-to-date, placing it fourth among the nine sector SPDR ETFs. The backbone of XLP and other traditional consumer staples ETFs is often large weights to beloved, familiar, large-cap stocks such as Dow components Coca-Cola (NYSE: KO), Procter & Gamble (NYSE: PG) and Wal-Mart (NYSE: WMT).
Thanks to the rapid expansion of strategic beta ETFs, investors have an increasing number of options for taking different, more growth-driven approaches to the prosaic and defensive staples sector. One such option is the $2.1 billion First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG). [Smart Beta ETFs Keep Gaining Traction]
FXG, which is seven and a half years old, carries a five-star Morningstar rating. Importantly, the ETF is up nearly 21% year-to-date, making it 2014’s top-performing consumer staples ETF. [Bright Strategic Beta ETFs]
FXG has shined among staples ETFs without large weights to the sectors usual suspects. For example, the only member of FXG’s top-10 lineup that frequently appears among the top holdings in cap-weighted staples ETFs is CVS Caremark (NYSE: CVS). Procter & Gamble and Coca Cola combine for just 2.7% of FXG’s weight while Wal-Mart is not a member of the ETF’s roster.
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 $16.8 billion, which is significantly lower than cap-weighted staples ETFs.
Another 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 and Coca-Cola (NYSE: KO), FXG is able to offer more of a growth feel to a sector more associated with defense, not growth. [Super Staples ETFs]
Searching for growth opportunities among staples can prove rewarding. FXG proves as much. FXG’s top-five holdings, a group that combines for nearly a quarter of the ETF’s weight, have returned an average of 55.3% this year. Underscoring that quintet’s and FXG’s strength, the worst performer of that group, Hain Celestial (NasdaqGS: HAIN), is up more than 27%.
There are sacrifices to be made for the privilege of FXG’s out-performance, namely the ETF’s dividend yield is skimpy compared to traditional rivals. That is the result of heavier exposure to growth-ier staples that have not established dividend track records on par with Procter & Gamble and Coca-Cola. FXG’s trailing 12-month yield is 100 basis points below XLP’s.
FXG’s underlying index, the StrataQuant Consumer Staples Index, has a three-year standard deviation of 12% compared to 9.6% for the S&P Consumer Staples Index while the latter has a slight higher Sharpe Ratio, according to First Trust data.
First Trust Consumer Staples AlphaDEX Fund
