Caution Call on Consumer Staples ETFs

“By many valuation metrics, however, consumer staples are quite overvalued. As of May 23, 2016, the Consumer Staples Select Sector ETF had a trailing price-to-earnings (P/E) ratio of 21 compared to 18 for the S&P 500. Its P/E-to-growth (PEG) ratio of 2.5 tops the S&P 500’s 1.8,” reports Investopedia.

Defensive sectors often trade at premium valuations relative to the broader market and that is certainly the case at the moment with the consumer staples and utilities groups.

However, that does not mean investors should flee richly valued groups such as consumer staples and utilities. In fact, the case for these higher-yielding sectors could be getting a boost as bond markets are pricing in diminishing chances of the Federal Reserve boosting interest rates later this month while also reducing the odds of a July rate hike.

Related: Paying For Protection

Of XLP’s “top five holdings, all of them had P/E ratios greater than 21 as of May 23, 2016. In 2010, most of the companies had P/E ratios between 13 and 16. Investors are essentially paying 50% more for earnings today than they were in 2010 for these companies,” according to Investopedia.

For more information on the consumer staples sector, visit our consumer staples category.

Consumer Staples Select SPDR