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As the American economy has improved to start the year, many investors have flowed back into high beta sectors which were among the biggest losers in years past. Of these sectors, one of the top performers this year has undoubtedly been the consumer space as the prospect of solid levels of job creation has boosted the hopes of many firms in this corner of the market. Thanks to this, investors in products like (XLY - ETF report)—the SPDR that follows the consumer discretionary sector—have been among the biggest winners to start 2012, as the fund has outpaced the S&P 500 by well over 100 basis points in the short time period.
However, investors should note that the boost in discretionary firms has not transferred over into the staples space as these securities have fallen out of favor with many investors in the new year. In fact, the Consumer Staples SPDR (XLP - ETF report) has underperformed the S&P 500 by close to 700 basis points in 2012, making it one of the worst performing major American sectors in the time frame. Beyond showing just how different investors feel regarding these two sectors, this trend has interesting implications for a niche product in the sector, the Dynamic Food & Beverage ETF (PBJ - ETF report) from PowerShares (read Ten Best New ETFs Of 2011).
At first glance, some investors might assume that this product is heavily exposed to restaurant firms and other securities that fall into the consumer discretionary sector, but that is not the case at all. Instead, PBJ puts just 13.4% of its assets in consumer discretionary firms, allocating high weightings in this space to McDonalds (MCD), AFC Enterprises (AFCE - Snapshot Report), and Papa John’s International (PZZA - Snapshot Report). This lack of exposure to surging companies like Yum Brands (YUM - Analyst Report) and Starbucks (SBUX - Analyst Report) has left the door open for less cyclical companies in the fund which dominate the holdings in the product.
This non-cyclical segment, which occupies nearly 85% of total assets, is dominated by lower beta stocks which have not participated as much in the recovery. That is because the top holdings in this segment—such as Kraft Hershey (HSY - Analyst Report) and Kroger (KR - Analyst Report)—tend to do a similar amount of business no matter what the economic environment is, suggesting that they have less to gain from better economic conditions. After all, people are still going to go grocery shopping and buy basic goods no matter what the overall economic environment is in this country or anywhere else. Thanks to this, restaurant firms have seen much higher levels of earnings estimate revisions, pushing stocks in this sector far higher up the Zacks Rank than others; the restaurant industry is rated in the top 20% while many food sectors are in the bottom half of the Zacks Industry Rank (read Top Three Consumer Staples ETFs).
Yet, while the fund may be heavily exposed to consumer staples firms right now, this might not always be the case. Investors should note that the product doesn’t use a pure market cap methodology but instead follows what PowerShares calls the ‘Intellidex’ method. This technique evaluates companies on a variety of metrics including fundamental growth, stock valuation, investment timeliness and risk factors for inclusion in the benchmark. This gives the product a total holdings list of 30 companies but it also increases the costs as expenses for this fund come in at 63 basis points a year (see Three Low Beta Sector ETFs).
Due to this distinction, the fund may move more fluidly between consumer staples and consumer discretionary spaces than many investors might think. However, at least for now, the exposure to lower beta stocks—the portfolio of PBJ has a beta of just 0.69 with the S&P 500—seems to be quite high and could remain so until at least the next rebalancing date. As a result, the fund may not be the most appropriate for those seeking a high beta play on the consumer sector suggesting that while it may be a safer play on the market, it is unlikely to be a big winner as well, especially if economic conditions continue to improve at a solid rate.
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