The Comprehensive Guide To Consumer Staples ETFs (PBJ, PSL, ECON, IYK, FXG, KXI, VDC, XLP)
Eric Dutram: With the entire U.S. equity market in the doldrums, it has been a rough time to be a stock investor. However, a few of the defensive sectors have been able to hold up better than most, including the traditional safe havens such as consumer staples, health care, and utilities.
In particular, consumer staples firms have been a solid performer as of late and could continue to have a leadership role in the coming months. That is because consumer staples firms remain more or less impervious to economic cycles and play a defensive role when the macro economy is under pressure. The resilience of the sector was displayed during the recent slump in the US aggravated by the debt crisis in Europe (Top Three Consumer Staples ETFs).
The sector appears to be defensive as it includes manufacturers and distributors of food, beverages and tobacco and producers of non-durable household goods and personal products. Also included are food & drug retailing companies as well as hypermarkets and consumer supercenters which are considered essential for daily needs. Consumer staples ETFs therefore flourished during the downturn because of steady demand for consumer essentials and the low levels of correlation it has with economic cycles.
Ironically, with the equity market recovering the sector has proved somewhat to be a laggard. Though the top line would grow as usual, margins would take a hit from escalating food prices, although this has reversed with sagging commodity prices as of late.
The saving grace here is the markets in the emerging economies where demand is on the rise. Operating margins are also higher in these regions because of favorable foreign exchange translation and lower production costs.
Beverage companies such as Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) have been seen to expand their business in the emerging markets of India, Russia and China, as the developed markets are approaching saturation.
However, headwinds have appeared in the form of rising raw materials prices in some key segments. Firms have sought to mitigate this by reducing packaging sizes, much to the chagrin of consumers, although this does help to boost margins overall.
Cost reduction initiatives have also been on the radar. Coca-Cola has undertaken different productivity initiatives to streamline its cost structure and enhance profitability. In 2011, the company successfully completed its four-year productivity program, with annualized savings over $500 million, and has made plans to launch a new global productivity initiative in 2012 that will target $350 million to $400 million in annualized savings by the end of 2015.
Despite the cost constraints and the challenging economic environment, the sector continues to introduce new products and improvise on current products in order to meet the changing demands of customers.
Nevertheless, despite the challenges, the sector has positioned itself well to take advantage of shifting markets both from a cost and a target perspective. Additionally, should markets remain weak, the segment looks likely to be a better choice than the more volatile sectors, suggesting that some investors may want to consider the space for lower risk investing.
Thanks to these developments, some investors have shown ample interest in the staples sector. For investors seeking to play this trend in ETF form, there are a variety of consumer staples ETFs offering excellent exposure. Below, we discuss briefly 15 ETFs which fall in this sector, any of which could help investors gain targeted exposure to the space:
Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP)
The Consumer Staples Select Sector SPDR Fund is the oldest product in the space with a high liquidity level which provides exposure to the consumer sector at the lowest cost. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Consumer Staples Select Sector Index.
The product appears to be very liquid as approximately 8.6 million shares change hands on a daily basis. The fund invests its $5,548.9 million assets in a small basket of 43 stocks. However, the fund invests 69.4% of its asset in the top ten holdings which suggest that the fund is highly concentrated in the large cap equities.
Among the sectors that the fund is more tilted towards include; Beverages and Food, and Staples Retailing, as these two hold the lion’s share making up (combined) 42.2% of the total investment. For this exposure, the investor pays an expense ratio of 18 basis points, one of the lowest in the space. Due to a lower correlation with the broader market, the fund delivered a return of 5.4% over a period of one year. (Three Low Beta Sector ETFs)
Vanguard Consumer Staples ETF (NYSEARCA:VDC)
Investors seeking to play with the broader basket of stocks at the lowest cost possible should invest in Vanguard Consumer Staples ETF. The fund provides exposure in stocks of companies that provide direct-to-consumer products based on consumer spending habits and are considered non-discretionary.
The ETF tracks the MSCI US Investable Market Consumer Staples 25/50 Index and tracks a broader basket of 108 consumer staples stocks unlike XLP. The fund has a total asset base of $1,031 million of which 64.1% is invested in the top 10 holdings. So like XLP, this fund also appears to be concentrated with assets tilted towards the large caps.
Among the different industries, household products and soft drinks take the top spots with 37.3% of investment made in these two categories. VDC charges a reasonable premium of 19 basis points for the investment.
A broader exposure to consumer staples companies did not help the fund to beat the one-year return of XLP, although it just missed the State Street product’s return.
S&P Global Consumer Staples Sector Index Fund (NYSEARCA:KXI)
The S&P Global Consumer Staples Sector Index Fund (ETF) seeks investment results that generally correspond to the performance of the S&P Global 1200 Consumer Staples Sector Index. KXI provides access to 99 stocks of the consumer staples industry through an asset base of $457.6 million.
Currently, the fund invests 46.7% of its asset base in the top 10 holdings, suggesting a moderate level of diversification, although more so than many other products on this list. Nestle and Procter & Gamble Co. (NYSE:PG) take the top two positions with nearly 14.33% of investment.
Among sectors, the fund is more tilted towards Food Beverage & Tobacco Industry with 64.5% of investment. (Time To Buy The Food and Beverage ETF (PBJ)?) The fund delivered sold returns in line with other products and charges a fee of 48 basis points a year from investors.
First Trust Consumer Staples AlphaDEX Fund (NYSEARCA:FXG)
Investors seeking to invest in ETF, which follows an active approach for investment, should look to FXG in the consumer staples ETF world. The fund employs the AlphaDEX methodology which seeks to rank stocks on growth and value factors in order to determine weightings. Investors should also note that the bottom-ranked 25% are also excluded from the fund, potentially giving FXG a more concentrated approach than its counterparts.
Again, the fund provides exposure to a small basket of 38 stocks with 44.5% of the total asset base of $436.7 million invested in the top 10 holdings. The top 10 individual holding pattern suggests that the fund is not inclined towards large blue chip and believes in investing more in small cap securities, although this can change based on the AlphaDEX outputs.
Monster Beverage Corporation (NASDAQ:MNST) and Tyson Foods Inc. (NYSE:TSN) occupy the top two positions with 10.1% of investment. Among sectors, the fund is more partial towards the Food Products sector with 44.85% of the portfolio.
The fund also appears to be expensive charging a premium of 74 basis points, higher than the other ETFs in the space. Additionally, the fund’s performance has come in below its counterparts in the space, at least over the past one year period.
Dow Jones U.S. Consumer Goods Sector Index ETF (NYSEARCA:IYK)
iShares launched Dow Jones U.S. Consumer Goods Sector Index ETF which seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Consumer Goods Index. The fund with a total asset base of $403.9 million provides exposure to a broader scale of consumer staples companies with a total of 123 stocks.
However, the fund appears to be heavily invested in the top 10 holdings as it puts 57.7% of its assets in the top 10 holdings. Like other ETFs, this fund also appears to be concentrated in large blue chips like Procter & Gamble Co. (NYSE:PG) and Coca-Cola (NYSE:KO), which occupies the top two positions.
Among sectors, Food Products & Beverage got the top preference with 40.7% of asset invested in it. The fund charges a total fee of 47 basis points and has delivered solid returns in line with many of its counterparts over the past year.
EGShares Emerging Markets Consumer ETF (NYSEARCA:ECON)
The EGShares Emerging Markets Consumer ETF seeks to achieve its investment objective of total return by investing in the constituent securities of the Dow Jones Emerging Markets Consumer Titans Index. The index measures the stock performance of 30 leading emerging-market companies in the Consumer Goods and Consumer Services Industries as defined by the Industry Classification Benchmark.
Emerging market consumers do most of their business with familiar local or regional brands, and tend to have less affinity for developed world brands (for the most part). ECON is designed to provide organic exposure to these consumers; almost all of the revenues of the underlying companies are derived from emerging market sales, providing truer exposure to this growing theme.
The fund through an asset base of $402.5 million taps 30 emerging market stocks. However, the fund appears to be highly concentrated in the top 10 holdings with 58.8% of the assets invested. This indicates that the fund is not spread out among other companies.
Among sectors, the fund has 15.8% invested in Beverages thereby holding the top position in sector profile of ECON. Among the emerging markets, Mexico and Brazil were the top two destinations for investment. The fund appears to be the most expensive ETF on the list with an expense ratio of 85 basis points, and has had trouble keeping up with other products on the list in terms of capital gains over the past year.
Power Shares Dynamic Food and Beverage ETF (NYSEARCA:PBJ)
For investors seeking a concentrated play on the food and beverage segment PBJ could be an interesting pick. The fund tracks the Dynamic Food & Beverage Intellidex Index which uses different investment criteria like price momentum, earnings momentum, quality, management action, and value to include stocks in the list.
This has led to the inclusion of 29 stocks in the fund with AUM of $169.2 million. 47.8% of this asset base is invested in the top 10 holdings, which suggest that the fund is moderately concentrated in the top 10 holdings. Yum! Brands, Inc. (NYSE:YUM) takes the top position in the ETF while among sectors, consumer discretionary leads with 16.8% of investment.
The fund charges an expense ratio of 71 basis points, which is somewhat higher than many other products on the list while the fund has also underperformed thanks to its heavy consumer discretionary component.
Power Shares Dynamic Consumer Staples Sector ETF (NYSEARCA:PSL)
One more fund in the space from PowerShares in the space is the Dynamic Consumer Staples Sector ETF (PSL). PSL is a passively managed exchange traded fund (ETF) designed to track the performance of the Dynamic Consumer Staples Sector Intellidex Index dominated by the stocks selected on the basis of various investment criteria.
59 stocks from the consumer staple sector comprise the PSL holding list with a total asset base of $38.6 million. The fund invests 26.7% of its asset base in the top 10 holdings, which signifies that the fund does a pretty good job spreading out assets among the various firms.
Among individual holdings, Coca-Cola (NYSE:KO) and Kimberly-Clark Corporation (NYSE:KMB) are the companies where the fund has maximum exposure. The fund over a period of one year has delivered a return in line with other products on the list though expenses are high, coming in at 65 basis points a year (Lower Wal Mart Exposure With These Consumer ETFs).
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