The Consumer Staples Select SPDR (NYSEArca: XLP), the largest ETF tracking the consumer staples sector, jumped about 2% and some market observers believe the usually slow-moving sector can continue surging into the end of this year.
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.
Consumer staples is viewed as a rate-sensitive sector and the Federal Reserve is widely expected to boost borrowing costs at its December. However, market observers believe if the U.S. dollar does rebound, that increase will be gradual. XLP is up just 8.3% year-to-date, less than half the 17.3% returned by the S&P 500.
“Consumer staples has outperformed recently, rallying more than 3 percent this month, making it the second-best-performing sector. The sector got a boost this week from a string of positive news out of some names such as Wal-Mart,” reports CNBC.
Dow component Wal-Mart is usually one of the largest holdings in cap-weighted consumer staples ETFs, such as XLP.
“Larry McDonald, founder of the Bear Traps Report investment newsletter, expects the upside for the group will likely continue, particularly over the next 6 months, as value stocks fall back into favor and volatility picks up,” according to CNBC.
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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.
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.
Rivals to XLP include the Vanguard Consumer Staples ETF (NYSEArca: VDC) and the Fidelity MSCI Consumer Staples Index ETF (NYSEArca: FSTA).
For more information on the consumer sector, visit our consumer staples category.