ETF Trends
ETF Trends
  • XLP is one of best-performing consumer staples ETFs on a year-to-date basis with gain of nearly 2%
  • Overall, consumer staples space – notably food companies – are experiencing slower growth
  • With investors playing defense, XLP and rival ETFs have new found allure

In a year in which investors have prized defensive, low volatility assets and sectors, it’s not surprising that the Consumer Staples Select SPDR (NYSEArca: XLP) is one of the best-performing sector exchange traded funds on a year-to-date basis with a gain of nearly 2%.

XLP’s bullishness this year is a reversal of fortune from late 2015. XLP and rival staples ETFs had their hands full with rising rate-related issues. For example, several of the largest staples names have reported lackluster earnings, blaming the strong dollar for weak overseas currency conversions.

“Margins appear to be getting squeezed this year, and the strong USD isn’t helping things by acting as a headwind to revenue growth from abroad, resulting in a forecast decline in EPS this year. Estimates for next year look better. In any case Consumer Staples stocks have seen their P/E multiples expand considerably over the last five years. As a result these stocks appear rather expensive, and Staples has an UNDERWEIGHT recommendation,” according to AltaVista.

There are other issues to consider as well. The consumer staples space, notably food companies, is experiencing slower growth. According to FactSet, quarterly revenues for companies on the food-products index declined 10.5% year-over-year, with 57% of companies having reported.

However, with investors playing defense, XLP and rival ETFs have new found allure.

“If you look at the bigger picture, XLP has appreciated 87.47% since its inception on Dec. 16, 1998. Think about that inception date for a minute. This means that XLP has delivered a gain to investors despite the Tech Bubble, 9/11, and the Financial Crisis. What makes XLP even more intriguing as a low expense ratio of 0.14% — the average ETF expense ratio is 0.46%,” reports Investopedia.

The First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG) is another way of playing the staples sector. FXG uses a different type of strategic beta approach to staples stocks.

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]

Consumer Staples Sector SPDR

Tom Lydon’s clients own shares of FXG.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.