Be Careful With Staples ETFs

Related to interest rate speculation, there is another problem for staples stocks: The rising dollar. Over the past several weeks, the greenback has caught fire, which is not good news for the staples sector because many of the names found in ETFs like XLP generate significant portions of their sales in international markets.

“Both our Food & Beverage and Cosmetics, Household & Personal Care (HPC) teams point out that cost savings and self-help have driven earnings growth in recent years, which could continue. But they note that many of these cost savings programs have already been in place for a number of years, and with stagnant sales, they expect continued consolidation in the sector in 2017. Increased activism may also benefit some names in the space. Within Tobacco, our team expects fundamentals to remain solid but less positive vs. 2016, and that domestic stocks could remain in favor given potential for tax reform, US consumer strength, and a stronger dollar,” according to the Bank of America note seen in Barron’s.

Also boding poorly for staples is the fact that cyclical sectors, such as industrials and technology, have been market leaders for the past several months. That could be a sign investors are comfortable with higher beta groups over defensive equivalents.

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