The Consumer Staples space looks quite well placed for this year, given a stable U.S. economy. With unemployment rate at its 17- year low, favorable consumer spending, healthy consumer confidence and increased business investments, the economy appears to be in good shape.
Also, the latest GDP data speaks of healthy domestic economy. Per the Bureau of Economic Analysis, the third and final estimate for third-quarter GDP jumped at an annual rate of 3.2%. Notably, the underlying strength in the U.S. economy paved the way for three rate hikes last year, leaving doors open for three more hikes in 2018.
Clearly, the favorable economic conditions bode well for consumer-driven companies. Moreover, Trump’s latest tax reform is likely to offer a boost to many consumer goods companies. Apart from this, we also expect the Consumer Staples sector to gain from focus on innovation, product launches and strategic buyouts.
However, many companies in the consumer staples space garner significant revenues from emerging markets. While some emerging markets are witnessing improved trends, exchange rate volatility and other global risks remain threats. Moreover, responsiveness to rising consumer preference for organic products remains a challenge as it creates competitive pressure, price wars and a high promotional environment, thereby posing threats to margins.
Additionally, greater marketing costs, along with volatile input prices remains a concern. Nonetheless, the companies are undertaking aggressive efforts to keep pace with shifting consumer patterns. In this regard, the sector players remain committed to adopting the e-commerce mantra, alongside adding organic products to their portfolios. Also, their stringent cost-cutting measures are noteworthy.
Playing the Sector Through ETFs
That said, let’s take a look at few Exchange Traded Funds (ETFs) tracking the industry, which offer great prospects. Notably, ETFs present a low-cost and convenient way to get diversified exposure to the consumer staples sector.
Consumer Staples Select Sector SPDR ETF(XLP):
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 36 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 Pepsico, Inc. (PEP). The fund’s expense ratio is 0.14% and it pays out a dividend yield of 2.63%. XLP had about $8,173 million in assets under management as of Jan 12, 2018.
Vanguard Consumer Staples ETF(VDC):
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 102 stocks, with the top three holdings being Procter & Gamble, Coca-Cola and PepsiCo. It charges 0.10% in expense ratio, while the dividend yield is 2.53% as of now. VDC managed to attract roughly $3,940 million in assets under management till Jan 12, 2018.
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 and constitutes 35 stocks, with the top holdings being Coty Inc. (COTY), CVS Health Corporation (CVS) and General Mills, Inc. (GIS). The fund’s expense ratio is 0.40% and it pays out a dividend yield of 1.92%. RHS had about $483.6 million in assets under management as of Jan 12, 2018.
First Trust Consumer Staples AlphaDEX(FXG):
FXG, launched on May 8, 2007, follows the equity index called StrataQuant Consumer Staples Index. FXG is made up of 40 consumer staples securities, with the top holdings being CVS Health Corporation, Bunge Limited (BG) and Lamb Weston Holdings, Inc. (LW). The fund’s expense ratio is 0.61% and the dividend yield is 1.33%. It had $371.6 million in assets under management as of Jan 12, 2018.
Fidelity MSCI Consumer Staples ETF (FSTA):
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 0.08% and the dividend yield is 2.43%. FSTA had about $336.4 million in assets under management as of Jan 12, 2018.
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