Consumer staples stocks and exchange traded funds, such as the Consumer Staples Select SPDR (NYSEArca: XLP) and the Vanguard Consumer Staples ETF (NYSEArca: VDC), were expected to face headwinds coming into 2017. The combination of the expected interest rate hikes by the Federal Reserve and a stronger dollar were seen as potential drags on rate-sensitive consumer staples companies that derive significant portions of their revenue from ex-US markets.
Amid fears of rising interest rates and concerns that the sector is overvalued even relative to its lofty historical norms, the consumer staples sector has recently encountered some headwinds.
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, VDC is nearly 2% since the start of the year and is within striking distance of its 52-week high set in the third quarter of last year. Increasing consumer spending could benefit staples ETF such as VDC, which are home to scores of well-known consumer brands.
“Consumer spending has been increasing over the past couple months and consumer sentiment is rising. Consumer psychology is an important factor in whether there is economic growth,” according to InvestorPlace. “According to the Bureau of Economic Analysis, consumer spending in the U.S. generates about 70% of the country’s GDP. That means, we live in a consumer-generated economy.”
In the early part of 2016, defensive sectors, such as staples, were leaders, but that trend has reversed. The cyclical energy and technology sectors are now this year’s best-performing groups. That could be further confirmation investors expect interest rates to rise because cyclical sectors usually perform well as borrowing costs increase.
Staples stocks are comparably valued to their consumer discretionary peers, but some market observers argue that possible increases in household debt would make staples more attractive while wage growth would likely benefit both consumer sectors.
“VDC is handing out a very respectable, near-3% dividend. This is a factor in the ETF’s total return, meaning that we’re looking at a minimum return of 3% just for holding VDC. That’s a pretty good head start. And it’s the highest dividend given out by the top consumer staples exchange-traded funds,” adds InvestorPlace.
For more information on the consumer sector, visit our consumer staples category.