The Consumer Staples Select Sector SPDR ETF (NYSEArca: XLP), the largest exchange traded fund tracking the consumer staples sector, and rival cap-weighted staples ETFs are rallying to start 2019 as some investors embrace defensive sectors.
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.
“Consumer Staples has been one of the least-favored sectors since mid-2016, underperforming the broad market by 16% annually as interest rates rose and economic growth accelerated,” said State Street in a note out Friday. “However, as long-term interest rates have started to head south on the backdrop of decelerating growth prospects, Consumer Staples have played a good defense in the equity market.”
Looking Ahead for XLP ETF
Investors typically shift into consumer staples during bouts of market volatility because of the sector’s relatively generous dividend payouts and the slow-and-steady nature of the consumer staples business – consumers usually continue purchase basic products that staples firms sell regardless of market or economic conditions.
XLP is home to 33 stocks with a weighted average market capitalization of $123 billion. The fund has a dividend yield of 2.99 percent. Historically, declining Treasury yields benefit the consumer staples sector.