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Consumer staples companies sell relatively low-priced products that consumers use in their daily lives, including food, beverages and products for personal hygiene or household cleaning. The enduring demand for these products irrespective of the economic cycle makes the sector defensive.

Consumer staples stocks have attracted a lot of investor attention in the current environment of ultra-low interest rates as most of these companies pay out high dividends. Despite recent pull-back, this sector has outperformed the S&P 500 in the year-to-date period, generating gains of 13.3% compared with gains of 11.9% for S&P 500, as of July 1, 2013. (Read: 3 Sector ETFs to profit from rising rates)

Though consumer staple companies, due to their defensive nature, are much less exposed to changes in income, they are still impacted when consumer confidence drops or income declines. In such a scenario, consumers buy staples but prefer cheaper brands, which hurts the profitability of the sector.

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. (Read: 3 New ETFs you should not ignore)

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. (Read: 3 Top Financial ETFs to buy now)

Unfortunately, there are many companies which are still impacted by the macro-economic environment in the U.S. Higher gasoline prices, payroll tax increases and a tough labor market are burdening U.S. consumers in addition to slow job growth, high interest rates and tightened credit availability. The persistently sluggish European economic conditions and worries about China’s growth outlook also create an overhang.

Playing the Sector Through ETFs

ETFs present a low-cost and convenient way to get a diversified exposure to this sector. Below we have highlighted a few ETFs tracking the industry:

Consumer Staples Select Sector SPDR ETF (XLP - ETF report):

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 Co. (PG), The Coca-Cola Co. (KO) and Philip Morris International Inc (PM).

The fund’s expense ratio is 0.18% and it pays out a dividend yield of 2.78%. XLP has about $6.6 billion in assets under management as of Jun 26, 2013.

Vanguard Consumer Staples ETF (VDC - ETF report):

Initiated on Jan 26, 2004, VDC is an ETF that 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 113 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 2.56% as of now. VDC has managed to attract $1.6 billion in assets under management till May 31, 2013.

First Trust Consumer Staples AlphaDEX (FXG - ETF report):

FXG, launched on May 8, 2007, follows the equity index called StrataQuant Consumer Staples Index. FXG is made up of 37 consumer staples securities, with top holdings being Green Mountain Coffee Roasters, Inc. (GMCR), The Kroger Co. (KR) and Tyson Foods Inc (TSN).

The fund’s expense ratio is 0.70% and the dividend yield is 1.98%, while it has $591.6 million in assets under management as of Jun 26, 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, with the top holdings being Whole Foods Market, Inc. (WFM), Constellation Brands Inc. (STZ) and Avon Products, Inc. (AVP).

The fund’s expense ratio is 0.50% and it pays out a dividend yield of 2.1%. XOP has about $69.6 million in assets under management as of Jun 27, 2013.

PowerShares Dynamic Consumer Staples (PSL - ETF report):

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 Kellogg Co. (K), General Mills Inc (GIS) and Costco Wholesale Corp (COST). The fund’s expense ratio is 0.65% and the dividend yield is 1.87%.

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