Despite a moderate recovery in the U.S. economy, investors are skeptical about the global issues that have been haunting the markets lately. The global economic slowdown and financial mayhem in China are the main reasons behind the stock market volatility and the decline in the global commodity complex. Also, stronger U.S. dollar, lower traffic and weakness in oil and other commodity sectors are adding to the woes.
In fact, consumer confidence – a key determinant of the economy’s health – declined drastically in February, marking the lowest in seven months, signaling that the overseas turmoil is taking a toll on the U.S. economy. (Read: Trump, Clinton Race Ahead: ETFs in Contest)
According to recent Conference Board data, the Consumer Confidence Index dipped to 92.2 in February from January’s revised reading of 97.8. This indicates the lowest level since Jul 2015. A slump in consumer confidence would definitely impact consumer spending, which accounts for over two-thirds of U.S. economic activity.
The overall tone of the global market remains soft, as we can estimate from the GDP figures, according to the advance estimate released by the Bureau of Economic Analysis. GDP struggled at 1%, after advancing 1.9% and 3.8% in the third and second quarter of 2015, respectively.
Nevertheless, market experts anticipate GDP growth of 2% for the January–March quarter on the back of an improving job scenario – with the unemployment rate hovering around 4.9% – and low gas prices that will help increase household wealth and eventually boost consumer spending.
In addition to this, improving home sales, higher business and government spending and a buildup in inventories are some favorable economic indicators that play a key role in raising buyers’ confidence. We expect this positive sentiment to translate into higher consumer spending in 2016.
Needless to say, the equity markets have become extremely volatile and the overall economic picture is quite bleak. However, we expect to witness a slow but steady recovery in the consumer staples industry, owing to the gradual improvement in consumer spending. (Read: Defensive ETFs Outperforming the Market)
Playing the Sector through ETFs
Owing to its defensive nature, this sector is likely to outperform when equity markets are bearish and underperform when bullish. The instability in the sector due to factors like U.S. and global exposure can be countered with a wide array of ETFs.
The ETFs can act as an excellent investment medium for those who are interested in a long-term exposure within the consumer staples sector.
For those interested in taking a look at consumer staples, we have highlighted a few ETFs tracking the industry, any of which could be an attractive pick:
Consumer Staples Select Sector SPDR ETF (XLP - Free 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 40 stocks of companies that manufacture and sell a range of branded consumer packaged goods. The top holdings include The Procter & Gamble Co. (PG), The Coca-Cola Company (KO) and Philip Morris International, Inc. (PM). The fund’s expense ratio is 0.14% and it pays out a dividend yield of 2.50%. XLP had about $9.345 billion in assets under management as of Mar 1, 2016.
Vanguard Consumer Staples ETF (VDC - Free 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 100 stocks, with the top three holdings being Procter & Gamble, Coca-Cola and PepsiCo, Inc. (PEP). It charges 0.12% in expense ratio, while the yield is 2.53% as of now. VDC managed to attract $3.1 billion in assets under management till Jan 31, 2016.
First Trust Consumer Staples AlphaDEX (FXG - Free Report) :
FXG, launched on May 8, 2007, follows the equity index called StrataQuant Consumer Staples Index. FXG is made up of 41 consumer staples securities, with the top holdings being Tyson Foods, Inc. (TSN), Hormel Foods Corp. (HRL) and Constellation Brands, Inc. (STZ). The fund’s expense ratio is 0.62% and the dividend yield is 1.67%. It had $2.44 billion in assets under management as of Mar 1, 2016.
Guggenheim S&P 500 Equal Weight Consumer Staples (RHS - Free Report) :
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 and constitutes 38 stocks, with the top holdings being Tyson Foods, Campbell Soup Company (CPB) and Reynolds American, Inc. (RAI). The fund’s expense ratio is 0.40% and dividend payout 1.75%. RHS had about $622.9 million in assets under management as of Mar 2, 2016.
Fidelity MSCI Consumer Staples ETF (FSTA - Free Report) :
FSTA, launched on Oct 21, 2013, is an ETF that seeks investment results corresponding to MSCI USA IMI Consumer Staples Index. This is a cap-weighted fund and constitutes 102 stocks, with the top holdings being Procter & Gamble, Coca-Cola and PepsiCo. The fund’s expense ratio is 0.12% and the dividend yield is 2.84%. FSTA had about $257.6 million in assets under management as of Jan 31, 2016.
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