It may not be a sign that all the easy money the current bull market has to offer has been made, but 2015 has been a bumpy ride for investors. Including today’s tumble, the Dow Jones Industrial Average has experienced seven triple-digit moves since Feb. 27.
Stomach-turning action like that is enough to prompt investors to consider lower beta fare. That means revisiting a popular consumer staples exchange traded fund, particularly at a time when rising 10-year Treasury yields are punishing utilities ETFs. Since February 2, 10-year yields are up 25.1%, a move that has dragged the Utilities Select Sector SPDR (NYSEArca: XLU) lower by nearly 11%.
The Consumer Staples Select Sector SPDR (NYSEArca: XLP), the largest consumer staples ETF, has been far more durable over that period, losing just 1%.
XLP “remains a strong choice for exposure to the sector. This exchange-traded fund holds a portfolio of mega-cap household names whose products consumers largely stick with regardless of the economic climate. As a result, its holdings generally have stable revenue growth and cash flows,” writes Morningstar analyst Robert Goldsborough in a new research note.
There are some concerns for XLP. For starters, the ETF has traded slightly lower this year due in large part to lethargy from some of its big-name holdings. For example, Procter & Gamble (NYSE: PG), Wal-Mart (NYSE: WMT) and Coca-Cola (NYSE: KO), XLP’s three holdings that are also Dow stocks, are among the 14 Dow stocks that are in the red to start 2015. [How Staples ETFs are Stacking Up]
Additionally, although staples stocks are not as sensitive to rising interest rates as their utilities counterparts, staples are viewed as a rate-sensitive group.
“Looking ahead, rising interest rates are a risk for the sector, along with continued strength in the dollar (which can be bad for some U.S. staples firms’ overseas businesses) and weaker global consumer spending,” adds Goldsborough.
On top of that, valuation for staples, a sector that as a result of its defensive posture typically trades at a premium to broader indexes, is looking stretched. By AltaVista’s estimates, XLP’s 2015 P/E ratio is expected to be 19.3, trailing only the Energy Select Sector SPDR (NYSEArca: XLE) among the nine SPDRs. XLP’s estimated price/book value ratio of four is the highest among the sector SPDR ETFs, according to AltaVista data. [Listening to Staples ETFs]
Said another way, investors typically pay a premium to access the low beta and steady dividends offered by the staples sector. The strong dollar is another issue to consider.
“Continued strengthening of the dollar has caused currency headwinds for consumer staples firms with strong overseas sales, weakening these firms’ quarterly results,” according to Goldsborough.
Over the past five years XLP and the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) have a correlation of -0.47, according to State Street data, underscoring the vulnerability of staples stocks to a strong greenback.
Consumer Staples Select Sector SPDR
