The Consumer Staples Select Sector SPDR Fund (NYSEArca: XLP), the largest exchange traded fund (ETF) dedicated to the consumer staples sector, is up about 12% this year and resides near record highs, but some market observers believe the usually safe consumer staples sector may not be the refuge from broader market volatility it once was.

While XLP is performing well this year, it is lagging the S&P 500, representing a sharp contrast from late last year when some found relative safety in this sector, which is typically popular during periods of volatility since investors would usually rely on consumer staples’ dividend yields and the steady nature of their businesses to offset the broader volatility. Since consumers will typically need to buy the products that staples firms provide regardless of market or economic conditions, investors tend to view the sector as a haven or defensive play.

Consumers’ shifting consumption and shopping habits are weighing on some staples firms while other companies, including some XLP components, can leverage brand recognition to thrive in a new world order for the consumer staples sector.

“While there have been some exceptions, such as Procter & Gamble (PG), a steady performer, and General Mills (GIS), now rebounding, many investors have abandoned the idea that staples are a haven,” reports Teresa Rivas for Barron’s. “There have been painful declines, not to mention the implosion at Kraft Heinz (KHC), the result of a constellation of problems from bad management to high debt.”

5 Biggest Consumer Staples ETFs By AUM

SymbolETF NameTotal Assets ($MM)YTDExpense Ratio
XLPConsumer Staples Select Sector SPDR Fund$11,225.7112.64%0.13%
VDCVanguard Consumer Staples ETF$4,721.6312.34%0.10%
KXIiShares Global Consumer Staples ETF$749.7712.68%0.47%
FSTAFidelity MSCI Consumer Staples Index ETF$485.5212.80%0.08%
IYKiShares U.S. Consumer Goods ETF$464.5814.97%0.43%

* Assets and Average Volume as of 2019-04-22 20:15 UTC, via ETFdb.com 

Examining XLP ETF

XLP provides “exposure to companies from the food and staples retailing, beverage, food product, tobacco, household product and personal product industries in the U.S.,” according to State Street.

With the business cycle potentially slowing next year, defensive sectors could be embraced by investors. Consumer staples, health care and industrial sectors typically outperform during the so-called slowdown period of a business cycle when economic growth starts decelerating but remains positive, the economy runs beyond its full capacity and monetary policy becomes restrictive.

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Retailers with significant consumer staples exposure are being affected by the same trends impacting consumer cyclical retailers, including shoppers’ affinity for online retail.

“Consumer behavior is adjusting rapidly amid new technologies which have changed how we shop,” said Bank of America Merrill Lynch’s Michelle Meyer in a recent note, according to Barron’s. “Those retailers that have been quick to understand the consumer of today have benefited. And those that have been looking for the consumer of yesterday have suffered.”

Bottom line: even sleepy staples companies have to adapt to shoppers’ tastes and desire for technology-driven experiences or risk ceding market share to rivals that will adjust to the changing consumer order.

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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.

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