Why Consumer Staples ETFs Make Sense? (XLP, PG, HSY, KO, RAI, KFT, SBUX, VDC, IYK, FXG, PBJ)
Sam Subramanian: As economic uncertainty heightens, investors prefer stocks of companies that enjoy stable demand for their products like food, beverages, toothpaste or soap. It is not surprising that the consumer staples companies are performing well. The Consumer Staples Select Sector SPDR (NYSEARCA:XLP) for example is up 11% year-to-date.
There are several reasons why companies in the consumer staples sector are doing well despite rising commodity costs.
Companies like Procter & Gamble (NYSE:PG) and The Hershey Company (NYSE:HSY) have successfully raised prices. Procter & Gamble for example has increased prices across all segments ranging from baby care & family care to grooming and health care to boost its revenue. The company is looking to additional product price increases in fiscal 2013 to contribute towards revenue growth.
Several consumer staples companies are implementing cost-cutting programs to offset rising commodity prices. PepsiCo (NYSE:PEP) for example is adopting new technologies & processes, consolidating facilities, and reducing workforce. Coca-Cola (NYSE:KO) is streamlining its global supply chain, standardizing the information system, and integrating Coca-Cola Enterprises’ North American business. Tobacco products manufacturer Reynolds American (NYSE:RAI) is eliminating surplus labor.
Consumer staples companies are also taking steps to improve long-term growth prospects.
The emerging markets of Asia, Eastern Europe, and Latin America offer ample growth opportunities for food companies. Growth of the affluent, urban middle class population is driving demand for processed & packaged foods in these markets. Kraft Foods (NYSE:KFT) for example has enhanced its distribution network in emerging markets by acquiring U. K. based Cadbury. Kraft is now leveraging this network to sell Oreo cookies and Tang drink mix in India. Kraft expects its emerging markets segment to become its key growth driver in the future.
Aiming to cash on rising health consciousness of consumers in U. S. and foreign markets, consumer staples companies are constantly upgrading their offerings through innovations. Starbucks (NASDAQ:SBUX) for example has launched Starbucks Refreshers, blending green coffee extract with juice from fresh fruits for distribution through selected grocery stores. PepsiCo has rolled out Pepsi Next, a mid-calorie carbonated beverage with 60% less sugar than the regular alternative. The company has also launched health conscious additions to Frito Lay product lineup. Coca-Cola is offering low calorie drinks and healthy beverages in emerging markets.
According to Sam Stovall of Standard & Poor’s, consumer staples stocks have historically fared well in Presidential election year stock markets. With many consumer staples companies executing well, the group may follow this pattern in 2012 too.
The following ETFs can suit stock investors seeking diversified exposure to consumer staples companies in this Presidential election year stock market:
- Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP)
- Vanguard Consumer Staples ETF (NYSEARCA:VDC)
- iShares DJ U. S. Consumer Goods ETF (NYSEARCA:IYK)
- First Trust Consumer Staples Alphadex ETF (NYSEARCA:FXG)
- PowerShares Dynamic Food & Beverage ETF (NYSEARCA:PBJ)
Dr. Sam Subramanian is Managing Principal and Chief Investment Officer of AlphaProfit Investments, LLC. He edits and publishes the AlphaProfit Sector Investors’ Newsletter™. The AlphaProfit Sector Investors’ Newsletter has received the distinction of getting ranked #1 by Hulbert Financial Digest several times. He also edits the AlphaProfit’s popular investing blog and e-letter MoneyMatters.