With higher beta, cyclical sectors leading U.S. equity markets higher this year, some defensive sectors are lagging. That is the case with consumer staples. The Consumer Staples Select SPDR (NYSEArca: XLP), the largest consumer staples ETF, is up just 5% year-to-date compared to a gain of 14% for the S&P 500.
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. Add to that, some technical analysts believe XLP, the bellwether staples ETF, is close to encountering technical difficulties.
“With the stock market rally hitting on just about all cylinders at the moment, consumer staples is one of the few areas that has not participated,” according to ETF Daily News. “Based on our approach of investing in the relative strength in the market, that would necessarily disqualify XLP. However, taking another view, it is also one of the few places in the market that is not substantially extended currently. If the trendline can hold again (potential Fibonacci support also lies just below ~52.78), this may be one of the few favorable risk/reward opportunities in the immediate-term.”
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Cyclical 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.
As measured by XLP, “the sector has tripled since the 2009 low, even before factoring in a solid dividend yield. Perhaps the best characteristic of the bull market in consumer staples, though, has been its steady, low-volatility path. At just about -12%, XLP has experienced the smallest post-2009 maximum drawdown of any of the sectors. This has provided for a relatively smooth ride for consumer staples investors,” reports ETF Daily News.
For the week ended Oct. 10th, investors pulled over $1 billion from XLP, bringing the ETF’s 2017 outflows to about $818 million.
For more information on the consumer sector, visit our consumer staples category.