Top Ranked Vanguard Consumer Staples ETF In Focus (VDC, PM, KO, PG)
Eric Dutram: Uncertain economic conditions and a shaky stock market have left investors anxious about their returns. In this regard, defensive sectors, and in particular consumer staples, might be a good option for investors to play the market safely.
After all, consumer staples securities have emerged as winners over the past couple of months given their low volatility which has made them a popular safe haven. That is because firms for consumer staples remain more or less impervious to economic cycles and play a defensive role when the macro economy is under pressure (read: 3 Consumer Staples ETFs for the Shaky Market).
The sector appears to be defensive as it includes manufacturers and distributors of food, beverages and products for personal hygiene or household cleaning that are considered essential for daily needs.
While it usually isn’t considered a growth segment, the demand for these products is on the rise in developing countries such as Brazil, India, Mexico, Russia and Southeast Asia. These emerging markets also offer ample growth opportunities in this segment.
Further, the shift of middle-class consumers to urban living is driving demand for convenient and branded packaged food. Companies in this sector continue to introduce new products and improve existing products in order to meet the changing demands of customers (read: Two Sector ETFs to Buy in 2013). Therefore, demand remains steady even during the economic slowdown due to their non-cyclical nature.
Given this trend, a look at the top ranked ETFs in the space, with a lower level of risk, could be a good idea (see more ETFs in the Zacks ETF Center). One way to find a top ranked ETF in the consumer staples space is by using the Zacks ETF Ranking system.
About the Zacks ETF Rank
A look at the top ranked consumer staples ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.
Using this strategy, we have found one ETF in the space that has a Zacks Rank # 1 (Strong Buy) with a ‘low risk’ tolerance level. The details are highlighted below:
Vanguard Consumer Staples ETF (NYSEARCA:VDC)
Investors seeking exposure to the U.S. consumer staple space may find VDC an intriguing choice. Launched in January 2004, this fund generated about 47% returns over the past three years.
The fund tracks the MSCI US Investable Market Consumer Staples 25/50 Index. This focuses in on direct-to-consumer product companies that are deemed nondiscretionary and thus relatively immune to the business cycle (read: The Comprehensive Guide to Consumer Staples ETFs).
The product holds a great deal of securities, over 109, although it does just an average job in spreading assets across individual securities. The fund puts around 62% of the assets in top ten holdings. Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO) and Philip Morris International (NYSE:PM) comprise nearly 30% of the combined share in the basket.
While the product is tilted towards large caps with about 83% of the exposure, mid and small caps make up the remaining portion of VDC. As a result, the fund tends to be less volatile than many other products in the space.
Among the different industries, household products and beverages take the top two spots in the basket with 37% of investment. The product has so far managed assets of $1.2 billion and half of the basket contains blend securities with a lower portfolio turnover.
Though volume is light with just over 75,000 shares moving hands on a regular basis, this ETF has the lowest expense ratio of 0.14% making it a cheap choice in the space.
Not only has VDC delivered impressive returns of about 11.0% last year, it has also shown a strong run-up in its prices this year, gaining nearly 2% so far in 2013. Further, the ETF yields a decent dividend of 2.85% annually, suggesting it could be a solid all-around choice for a variety of investors in this market environment.
In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.