Consumer Staples Play: VDC Or FXG?

November 08, 2013

Staple stocks are shining, but there are many ways investors can tap in to the segment.

Consumer staple stocks have been leading the nine sectors comprising the S&P 500 in the past month, gaining momentum in the face of relatively stable commodity prices and an overall U.S. economy that continues to expand, even if slowly.

As the name suggests, consumer staples consists of companies that provide goods and services people need both in good times and in bad, meaning the sector’s performance is not that sensitive to economic cycles. In fact, consumer staples are often looked at as relatively safe stocks, particularly in times when risk aversion is running high.

But in the past month, consumer staples stocks have tacked on gains of 7 percent, leading the S&P 500 to gains of 4.2 percent in that same period. That’s the best-performing S&P sector in the last 30 days.

However, year-to-date data show that consumer staples, as a sector, hasn’t really stood out in 2013. On the contrary, so far this year, consumer staples have performed largely in line with the broad stock market, currently ranking fifth among the S&P 500’s nine sectors, with gains of 23.5 percent year-to-date. But some believe more gains could lie ahead.

“During the past few months, there have been signs that the global economy will continue its modest growth trends, with some signs of improvement in foreign developed markets and potential stabilization in China,” Robert Lee, portfolio manager at Fidelity, said in a recent research note. “An environment featuring stable global economic growth tends to be favorable for the sales and earnings outlook for consumer staples companies.”

Indeed, Lee pointed out that despite the negative impact of a stronger U.S. dollar on these companies’ bottom lines, overall “business conditions” remain favorable for the sector going forward.

ETF investors looking to tap in to U.S. consumer staple stocks have 11 ETFs to choose from, with combined assets of more than $10 billion. Three of them serve up the closest you can get to pure sector exposure, while the remainder offer alternative takes on the sector.

The biggest of them all is also the veteran in the space, the Consumer Staples Select SPDR (XLP | A-91), with $7 billion in assets. Launched in 1998, XLP costs 0.18 percent a year, or $18 for every $10,000 invested, and its massive liquidity keeps trading spreads narrow, at only 2 basis points on a 60-day average—making it one of the cheapest funds in the segment.

1_XLP_VDC_FXG_IYK_YTD_Perf

Chart courtesy of StockCharts.com

 

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