With the S&P 500 in the midst of its worst weekly skid in more than a decade, investors are understandably rattled, and many aren’t thinking about boosting equity allocations.
At the sector level, technology and other growth groups are garnering the brunt of the blame for 2022 market weakness, and rightfully so, but there are some pockets of opportunity and strength. That includes consumer staples.
Check out the Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS). That equal-weight sector exchange traded fund is higher by 2.55% year-to-date, while the S&P 500 is lower by 13.39% year-to-date, as of May 6.
Experienced investors know that the consumer staples is a shelter-from-the-storm destination owing to below-average volatility traits and above-average dividend yields. Those concepts are holding true this year, but there’s more to the story. A significant portion of the sturdiness displayed by RHS is attributable to staples proving durable against the backdrop of persistent inflation. Simply put, many RHS components have compelling pricing power advantages.
“Not every industry or company can; however, capitalize on this backdrop. One key to investing in consumer staples over the near term may be finding companies with pricing power and with high gross profit margins,” according to Fidelity research. “Pricing power means a company can raise prices on what it sells—passing higher costs on to consumers—without losing too many customers. High gross profit margins mean, effectively, that a company can pass on substantially higher input costs with only small price hikes on its goods.”
The 2022 story for RHS is impressive in another regard: It’s proving the advantages of the equal-weight methodology. As noted above, the Invesco ETF is in the green on a year-to-date basis, while its cap-weighted rival is saddled with a small loss.
The $593.8 million RHS holds 33 stocks, 19% of which are beverage names. That particular allocation is relevant because some experts believe that beverage stocks will continue being sturdy in this turbulent market setting.
“Within consumer staples, beverage companies generally have some of the best gross profit margins and pricing power. Conversely, highly competitive industries, companies without strong brand loyalty, and ones with lower gross profit margins could have less success,” concludes Fidelity.
Monster Beverage (NASDAQ:MNST) is the third-largest holding in RHS at a weight of 3.39%. Industry stalwarts Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) combine for 6.4% of the ETF’s weight.
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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.