Eric Dutram: Now that the election is over, the focus of American investors is on the fiscal cliff. While it appears as though some compromise may be possible among the two major parties, investors are selling off just in case.
That is because there are some concrete worries over the capital gains tax rate heading into 2013 now that Obama has been assured a second term. Rates are expected to increase pretty much no matter what due to the Affordable Care Act, but due to the fiscal cliff, these taxes could increase back up to ordinary income levels, a near tripling of the current amount (see Could The Small Cap Healthcare ETF Be A Great Pick?).
Obviously this situation has spooked many investors and with the incredible gains that we have seen in the past year or so, there is great desire to lock in gains before the possibility of these higher rates kicks in. Given this, investors should probably expect a great deal of volatility as we close out the year as more is known about the impending fiscal cliff and if we will go over it to start 2013.
With this backdrop, a look to lower volatility securities could be ideal at this time. While there are a number of sectors that can accomplish this, a favorite of ours is the consumer staple segment (read the Guide to Consumer Staples ETFs).
Not only is this a lower volatility sector in normal market conditions, but unlike some of the other low volatility spaces—like utilities the dividends aren’t as high so worries about this part of the cliff shouldn’t hit staples as badly. Furthermore, the American consumer is seemingly back on track, so an ETF in this segment could be a great way to play the trend.
For these investors, we have highlighted below three of the lowest volatility consumer staples ETF, according to XTF.com data over the past year. Any of this trio could offer up investors potentially lower amounts of uncertainty, while still offering up quality exposure to an in-demand and increasingly rebounding sector:
Select Sector SPDR-Consumer Staples ETF (NYSEARCA:XLP)
This is easily the most popular consumer staples ETF out there, tracking the Consumer Staples Select Sector index. This benchmark includes a variety of staples segments like cosmetics, tobacco, personal care products, and of course food and drinks.
The fund has over $5.75 billion in total AUM, and the average daily volume is well over 5.5 million shares a day, so bid ask spreads will be exceptionally tight. Fees aren’t too bad either as the expense ratio is 0.18% a year while yields come in above 2.7% too (see Three Excellent Dividend ETFs for Safety and Income).
In total, the fund holds 43 stocks in its basket with big weights to large cap giants like (NYSE:PG), (NYSE:PM), and (NYSE:KO). From an industry look, household products, tobacco, beverages, and packaged food products all account for at least 16% of assets, suggesting a relatively well spread out profile for the fund.
Vanguard Consumer Staples Index Fund (NYSEARCA:VDC)
Another popular consumer staples ETF comes to us from Vanguard, tracking the MSCI US Investable Market Consumer Staples Index. This focuses in on direct-to-consumer product companies that are deemed to be nondiscretionary and thus relatively immune from the business cycle.
This product also has over $1 billion in total AUM, although volume is a tad lighter for this ETF with just over 60,000 shares moving hands on a regular basis. Expenses are also comparable to XLP, although this fund loses out by one basis point and has a slightly weaker annual yield (read Three Low Beta ETFs for the Uncertain Market).
VDC also holds a great deal more securities, over 110, although it does give big weights to a lot of the same firms listed above. Its industry dispersion is also quite similar, although in this case beverages are second, packaged food is third, and tobacco is fourth, while household products maintains its top spot.
Guggenheim S&P Equal Weight Consumer Staples ETF (NYSEARCA:RHS)
For a different approach to the consumer staples segment, investors have RHS to consider. This product tracks the S&P Equal Weight Consumer Staples Index, which means that the fund gives every stock in the benchmark the same weight, irrespective of market capitalization levels (read Is It Time For an Equal Weight ETF?).
This technique hasn’t caught on too much in the staples market, as the ETF has just $40 million in assets and sees about 13,000 shares in volume a day. Furthermore the expense ratio is a little high at 50 basis points a year while there is little in annual yield—2%– to make up for this added cost. Fortunately, the approach has outperformed others in the trailing three month period, although it has underperformed in longer time frames.
Still, the fund offers a radically different approach to the space, as no one firm accounts for more than 3% of assets, and the big three of KO, PM, and PG aren’t in the top ten. This produces a product that has roughly 33% in packaged food, and then double digits in beverages and household products to round out the top three.
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