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]
RHS is up 5.2% this year. The $2.66 billion First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG), 2014’s best-performing consumer staples ETF, is up 6.2% this year.
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]
Walgreens Boost Alliance (NYSE: WBA) is the only top 10 holding FXG and XLP share in common. However, FXG I home to decent weights to rumored acquisitions targets, including Monster Beverage (NasdaqGS: MNST), Hain Celestial (NasdaqGS: HAIN) and WhiteWave Foods (NYSE: WWAV).
S&P Capital IQ rates FXG marketweight.
Consumer Staples Select Sector SPDR
