Checking in on Staples ETFs

Consumers staples exchange traded funds spent significant time in the limelight in late March when Brazilian private equity firm 3G Capital and Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) announced that H.J. Heinz, a company those firms acquired in 2013, will purchase Kraft (NasdaqGS: KRFT), creating the world’s fifth-largest food company.

However, consumer staples ETFs bled over $2.3 billion in March despite falling 10-year Treasury yields as investors continued betting an interest rate hike from the Federal Reserve is not far off. In addition to the specter of higher interest rates, the rate-sensitive staples sector must also contend with tepid earnings growth due in part to the strong dollar.

“On a market-cap-weighted basis, the household products industry’s profit growth in 2015 is expected to be 0.7%, below its own five-year average of 1.8% as well as the estimated profit growth of 1.5% for the consumer staples sector, due to rising foreign currency exchange pressures and slowing international growth,” said S&P Capital IQ in a new research note.

Still, the staple sector offers tempting dividend yields. For example, the Consumer Staples Select Sector SPDR (NYSEArca: XLP), the largest consumer staples ETF, yields 2.53%, or more than 60 basis points higher than dividend yield on the PDR S&P 500 ETF (NYSEArca: SPY). [A Defensive, Old ETF Friend]

Dow component Procter & Gamble (NYSE: PG) and Kimberly-Clark (NYSE: KMB), two Dividend Aristocrats with some of the longest dividend increase streaks in Corporate America, combine for nearly 15% of XLP’s weight.

P&G “is the largest company in the industry, with a market cap of more than $200 billion. However, due to significant exposure to Europe, Asia, Latin America and other non-North American markets (61% of FY 14 revenues), the strength in the US dollar is a headwind. Due to an estimated negative 5% foreign currency exchange impact, Agnese estimates FY 15 (Jun.) sales will decline 3.5%. Organically, excluding currency, acquisitions, and divestitures, the company will likely post sales grow of 2%, according to Agnese’s estimates, driven by pricing increases and slight unit volume growth in core brands,” according to S&P Capital IQ.

The research firm has an overweight rating on the $8.14 billion XLP. [Sumptuous Staples ETFs]

S&P Capital IQ also highlighted XLP’s equal-weight equivalent, the $272.2 million Guggenheim S&P Equal Weight Consumer Staples ETF (NYSEArca: RHS). As an equal-weight ETF, RHS sports significantly reduced weights to household products dividend darlings like P&G and Kimberly-Clark. Those stocks combine for just 5.1% of RHS’ weight.

The equal-weight ETF, rated marketweight by S&P Capital IQ, is more heavily allocated to food and beverage names with those industries combining for nearly 59% of the fund’s weight. Eight of RHS’ top 10 holdings are food or beverage makers. [A Buffett Deal Could Lift These ETFs]