Consumer Staples ETFs; A Comprehensive Guide

The consumer staples sector has been generally weak over the past few quarters due to a difficult consumer spending environment that emanated from slow job growth and tightened credit availability. In addition, difficult operating conditions in Europe and a slowdown in some major emerging countries threatened growth.

Most of the large consumer staples stocks have somehow managed to increase their earnings on the back of cost controls, innovation, acquisitions and share buybacks, but only a few have been able to deliver impressive top-line growth – thus signaling a lack of real growth.

Consumer product companies therefore regularly need to innovate and upgrade their brands to boost consumer confidence and create differentiated value propositions for their customers in order to remain successful. Other than enhancing their products, the companies are also focusing on shifting consumer preferences, increasing health consciousness and rising obesity concerns. The companies are now inclined toward making healthier and nutritious products.

In order to boost profits and top-line growth, most consumer staples companies are divesting low-margin brands, improving the supply chain and implementing cost-reduction initiatives. These help the companies to reduce the effects of inflating commodity costs and other input costs, which have remained a drag on margins of most companies in this sector, despite top-line growth.

Besides costs saving initiatives, many consumer staples companies are shifting their focus to emerging markets to boost sales. With market saturation, low disposable income of consumers, uncertain macroeconomic conditions and increased competitive activity in developed markets, these companies are diverting their resources to explore emerging markets.

However, increasing presence in the emerging markets also brings along the negative impact from currencies for many consumer staples companies. A stronger dollar reduces the value of outside-U.S. sales and in turn limits growth in the emerging markets. But with improving standard of living in developing countries, the companies are now focusing on increasing pricing to derive profits, which was difficult earlier.

Playing the Sector through ETFs

Given the defensive nature of this sector, it will outperform when equity markets are more bearish and underperform when bullish. The ups and downs of the sector due to the U.S. and global exposure can be played with a wide array of ETFs.

Consumer Staples Select Sector SPDR ETF (XLP):

Launched on Dec 16, 1998, XLP is an ETF that seeks investment results corresponding to the S&P Consumer Staples Select Sector Index. This fund consists of 42 stocks of companies that manufacture and sell a range of branded consumer packaged goods, with the top holdings being Procter & Gamble, Coca-Cola and Philip Morris International Inc (PM). The fund’s expense ratio is 0.18% and pays out a dividend yield of 2.63%. XLP has about $5.7 billion in assets under management as of Oct 24, 2013.

Vanguard Consumer Staples ETF (VDC):

Initiated on Jan 26, 2004, VDC tracks the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. It measures the investment return of large-, mid-, and small-cap U.S. stocks in the consumer staples sector. The fund has a total of 111 stocks, with the top three holdings being Procter & Gamble, Coca-Cola and Philip Morris. It charges 0.14% in expense ratio, while the yield is 2.37% as of now. VDC has managed to attract $1.7 billion in assets under management till Sep 30, 2013.

First Trust Consumer Staples AlphaDEX (FXG):

FXG, launched on May 8, 2007, follows the equity index called StrataQuant Consumer Staples Index. FXG is made up of 38 consumer staples securities, with top holdings being Safeway, Inc. (SWY), Whole Foods Market Inc. (WFM) and GNC Holdings Inc. (GNC). The fund’s expense ratio is 0.70% and the dividend yield is 1.65%, while it has $689.2 million in assets under management as of Oct 24, 2013.

Guggenheim S&P 500 Equal Weight Consumer Staples (RHS):

Launched on Nov 1, 2006, RHS is an ETF that seeks investment results corresponding to the S&P 500 Equal Weight Index Consumer Staples. This is an equal-weighted fund and constitutes 40 stocks, with the top holdings being Whole Foods Market, Safeway and Lorillard, Inc. (LO). The fund’s expense ratio is 0.50% and pays out a dividend yield of 1.94%. RHS has about $79.7 million in assets under management as of Oct 25, 2013.

PowerShares Dynamic Consumer Staples (PSL):

PSL, launched on Oct 12, 2006, follows the Dynamic Consumer Staples Sector Intellidex Index. It comprises 60 stocks that are principally engaged in providing consumer goods and services that have non-cyclical characteristics, including tobacco, textiles, food and beverage, and non-discretionary retail. Top holdings include Walgreen Co. (WAG), Archer-Daniels-Midland Company (ADM) and Kimberly-Clark Corporation (KMB). The fund’s expense ratio is 0.65% and the dividend yield is 1.68%.

Fidelity MSCI Consumer Staples Index ETF (FSTA)

FSTA, launched last month, is the latest addition to the line-up. It charges a very low expense ratio of 12 basis points annually. Procter & Gamble (PG), Coca Cola (KO) and Philip Morris (PM) are the top three holdings as of now.

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