Consumer Staples ETFs: Why They're Outperforming

The consumer staples sector is outperforming the S&P 500 over the past month, suggesting investors are taking profits from the high-flying tech and consumer discretionary sectors and rotating into the relative stability of consumer non-cyclicals.

The largest exchange-traded fund in the sector, the Consumer Staples Select Sector SPDR Fund (XLP), rose more than 4% in the past month while the SPDR S&P 500 ETF Trust (SPY) gained just over 1% in the 30 days ending May 10.

Technology and consumer discretionary sectors are now lagging as they recorded one-month returns of 0.4% and –0.3%, respectively, as measured by the Vanguard Information Technology ETF (VGT) and the Consumer Discretionary Select Sector SPDR ETF (XLY). 

Is this outperformance from consumer staples a short-term fluke or might it be the beginning of a lasting trend in 2024?

Learn more about consumer staples ETFs, including how they work, the stocks they invest in, which are the largest funds in the sector, and related trends to watch. 

What Is a Consumer Staples ETF? 

A consumer staples ETF is a type of exchange-traded fund that focuses on tracking the performance of a consumer staples sector index. Also known as consumer non-cyclicals, the consumer staples sector includes companies that produce essential goods and services that people use on a daily basis, regardless of economic conditions.  

Consumer goods and services are considered essential for daily living, and demand for them tends to be relatively stable even during economic downturns. 

Companies Included in Consumer Staples ETFs 

Consumer staples companies typically offer products like food, beverages, household products, personal care items and other essential goods. Examples of companies within the consumer staples sector include those that manufacture and distribute items like food and beverage, cleaning products, tobacco and basic household items. 

Examples of consumers staples companies include: 

• Walmart Inc. (WMT) 
• Costco Wholesale Corporation (COST) 
• Johnson & Johnson (JNJ) 
• General Mills, Inc. (GIS) 
• Coca-Cola (KO) 
• Procter & Gamble (PG)  
• Philip Morris International (PM)

5 Top Consumer Staples ETFs by AUM

Data as of May 10, 2024.

Consumers May Be Shifting Buying Habits in 2024

As we cited on our recent story on why defensive sectors are outperforming in 2024, consumers may be shifting their buying habits, reducing their spending on non-essential items, and sticking to the essentials of consumer staples. Buying “experiences” like travel and leisure services appears to be giving way to tighter budgets. 

Although consumers have money to spend, as unemployment is historically low and wages are up, corporate earnings are revealing that consumer caution.

For example, last week, companies like Uber Technologies Inc., Airbnb Inc. and Shopify, Inc. had positive earnings but provided weaker-than-expected forward guidance, disappointing investors and potentially indicating a softening in the economy.  

Advantages and Disadvantages of Consumer Staples ETFs 

Consumer staples ETFs, like any investment option, come with their own set of advantages and disadvantages. Here's an overview of some of the key points to consider: 

Advantages

• Stability and resilience: Consumer staples companies tend to provide products and services that are considered essential for daily living. This stability can result in more consistent demand for their products, which can contribute to the sector's resilience, even during economic downturns. 
• Dividend income: Many consumer staples companies have a history of paying dividends to their shareholders. This can make consumer staples ETFs appealing to income-seeking investors, as these dividends can provide a regular income stream. 
• Diversification: Investing in a consumer staples ETF allows you to gain exposure to a diversified portfolio of companies within the sector. This diversification can help mitigate the risk associated with investing in individual stocks, as the impact of poor performance from one company can be balanced by the better performance of others. 
• Convenience and low costs: ETFs are traded on stock exchanges like individual stocks, offering the convenience of easy buying and selling. Additionally, ETFs often have lower expense ratios compared to actively managed funds, which can lead to lower investment costs for investors. 
• Long-term potential: Consumer staples companies tend to have an established market presence and brand recognition. While they might not experience the rapid growth of some other sectors, they can offer more stable, long-term potential for investors seeking steady returns. 

Disadvantages

• Limited growth potential: Consumer staples companies may not experience the same level of rapid growth as companies in sectors like technology or biotech. The relative stability of consumer staples can also lead to comparatively lower returns versus more volatile sectors during bullish market conditions. 
• Market changes: While the consumer staples sector is generally stable, it is not immune to market changes. Shifts in consumer preferences, increased competition, regulatory changes and economic downturns can impact the performance of these companies. 
• Dependency on dividends: While dividends can be attractive, they might also limit the capital available for reinvestment within the company, potentially affecting growth and innovation. 

Bottom Line on Consumer Staples ETFs in 2024

The recent shifts in favor from the riskier areas of technology and consumer discretionary sectors to defensive areas like consumer staples and utilities may be short-lived, but it’s possible that investors are anticipating an economic slowdown in the second half of 2024, which would continue to favor the steadier defensive stocks. 

Some investors use consumer staples ETFs as a way to add stability and defensive characteristics to their portfolio, while others might prefer to balance their exposure to different sectors to achieve diversification. However, it's important to note that all investments carry risks, and the value of an ETF can still fluctuate based on factors such as changes in consumer preferences, competition, economic conditions and more.