Historically, the summer months are often known for slow, lethargic markets with penchants for pullbacks. In preparation of those scenarios, investors can establish defensive positions, including with the Consumer Staples Select SPDR (NYSEArca: XLP).
XLP seeks to provide investment results that correspond generally to the price and yield performance of publicly traded equity securities of companies in the Consumer Staples Select Sector Index that includes securities of companies from the following industries: food and staples retailing; household products; food products; beverages; tobacco; and personal products.
Staples are extending a run of being sturdy amid the COVID-19 outbreak as the public seeks refuge within their homes, amid a haven of Clorox bleach, Coca-cola, and toilet paper. These are goods that will continue to be necessary regardless of the landscape, and some states are even mandating that stores remain open to sell them. XLP is coming off a second-quarter gain of about 9.50%.
“But the overall underperformance of XLP against the broader market in Q2 indicates that the market is still looking for a V-shaped economic recovery, even in the face of the day-to-day COVID headlines and fears of a second wave,” according to Seeking Alpha.
Why Now for XLP
The consumer staples segment has long been viewed as a high-quality and defensive play. The slow and steady nature of the consumer staples business has long been touted as a safe play for all periods since consumers will still need to buy the basic necessities.
Consumer staples, healthcare companies, and mature tech companies have some traits in common: they have few, if any, unprofitable quarters, and they have a cash hoard on their balance sheets to buffer against downtimes.
The coronavirus pandemic has caused a shift in the way Americans do business. Many traditional outlets that require face-to-face contact are struggling. Meanwhile, consumer staples have enjoyed strong demand as more stock up on basic goods, healthcare has found strength on continued demand for health services and technology companies are even enjoying continued business in response to the shift toward a work-at-home environment.
XLP’s recent resurgence reflects “a bounce-back that, while still leaving a huge hill to climb to get to pre-pandemic levels, are giving the market confidence,” according to Seeking Alpha.
The largest consumer staples ETF yields 2.64%.
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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.