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ETF News And Commentary

This earnings season has been solid with most companies reporting earnings above expectations. In fact, to date, total profits this earnings season are up 2.1% while revenues have increased 1.9% from the year-ago period.

From a sector perspective, financials have been the star performer while technology remains the biggest drag (read: 3 Bank ETFs Leading the Pack this Earnings Season).

Further, investors turned their focus on riskier assets (i.e. cyclical stocks) at the middle of second quarter, pushing down the consumer staples and many other defensive sectors over the past few months.

Consumer Earnings in Focus

However, one of the bellwethers – Procter & Gamble (PG - Analyst Report) – in this stressed space seems back on track after the return of A.G. Lafley as CEO in May. This is evident in its latest earnings release. The world’s largest consumer-products maker surpassed the Zacks Consensus Estimate on both earnings and revenues as it has been working on a turnaround plan.

The company’s earnings of 79 cents per share decreased 4% year over year, but beat our estimate by 2 cents. Revenues rose 2% to $20.7 billion and outpaced our estimate of $20.59 billion (read: 6 ETFs Beating the Market Over the Past Year).

In fiscal 2013, earnings per share and revenue increased 5% and 1%, respectively, from the prior year. These numbers are also above their respective Zacks Consensus Estimates.

Further, Procter & Gamble has given an encouraging guidance for fiscal 2014. The company expects earnings per share to grow 5% to 7% on sales increase of 1% to 2%. Organic sales are expected to climb 3% to 4% as well, suggesting a solid outlook.

Following the earnings beat, shares of PG climbed 2.4% in early trading hours but closed a little off these highs, adding about 1.7% on elevated volume.

ETF Impact

This solid run was also felt in the ETF world, with consumer staples ETFs surging (read: 3 Top Ranked Consumer ETFs to Buy Now). Many of the key funds in this segment have a double-digit allocation to the consumer product giant and gained in the day’s session too.

Since many smaller companies in the sector were buoyed by PG’s strength, they too had a good day, leading to smooth trading overall for the segment. In particular, higher trading was seen in the following three ETFs, as these have the biggest allocations to Procter & Gamble (see more in the Zacks ETF Center):

iShares Dow Jones US Consumer Goods Sector ETF (IYK - ETF report)

This ETF tracks the Dow Jones U.S. Consumer Goods Index, giving investors exposure to the broad consumer staples space. The fund holds about 120 stocks in its basket with AUM of $470 million while charging a slightly higher fee of 46 bps per year from investors.

Procter & Gamble occupies the top position in the basket with 12.02% of assets while others hold less than 8.4% of assets. This suggests that the performance of the fund is highly dependent on PG’s performance. However, the fund is widely diversified across sectors as none of them make up for more than 20% of IYK.

The fund gained 1.36% on the day and is up 22.24% in the year-to-date time frame. The product has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘Medium’ risk outlook.

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

The most popular consumer ETF on the market, XLP follows the S&P Consumer Staples Select Sector Index, and has amassed about $6.8 billion in its asset base. The fund charges 18 bps in fees per year from investors (read: Can the Consumer Staples ETF Go Higher?).

In total, the fund holds about 42 securities in its basket. Of these firms, PG takes the first spot, making up roughly 14.02% of the assets. In terms of industrial exposure, the fund is skewed towards food & staples retailing which makes up for one-fourth share, closely followed by household products (20.96%) and beverages (19.70%).

The fund returned over 19.5% so far this year and added 0.82% on the day. XLP currently has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘Low’ risk outlook.

Vanguard Consumer Staples ETF (VDC - ETF report)

This fund manages a $1.5 billion asset base and provides exposure to a basket of 113 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. The product charges low fee of 14 bps per year from investors.

Again here, PG is the top firm with a 12.3% allocation. The product is widely spread across household products, soft drinks, packaged foods & meat, tobacco and hypermarkets & super centers, as each makes up a double-digit allocation in the fund.

VDC added 22.42% year-to-date and 0.93% on the day. The fund has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘Low’ risk outlook.

Bottom Line

The stellar performance by PG signals that the consumer staples market may be back on track again as most of the consumer staples ETFs were up more than the overall market on the day.

However, valuations for the consumer staples sector looks overpriced at current levels and could be vulnerable to the rising interest rates environment, so make sure to pay close attention to other important names in the space to see which way the trend may head to close out the year (read: 3 Sector ETFs to Avoid as Interest Rates Rise).

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