Back to top

Image: Bigstock

Consumer Staples ETFs Red Hot: Will the Rally Last?

Read MoreHide Full Article

The consumer staples sector has been an area to watch lately given that a host of related ETFs are at a 52-week high. The largest staples ETF Consumer Staples Select Sector SPDR Fund (XLP - Free Report) is up 16% this year, leaving the S&P 500’s 14.9% gain. Over the past year, the staples fund has gained 15.1%, trumping the S&P 500’s 3.8% return (read: Wal-Mart's Mixed Q1 Results Drive Consumer ETFs Higher).

What Led to the Rally?

Trade war tensions and the resultant global growth worries have led several central banks from the developed markets to adopt an easy monetary policy, which in turn has resulted in a subdued dollar and Treasury bond yields. This should make a great investing scenario for Consumer Staples stocks and ETFs.

There is speculation that the Fed could cut rates this year. With falling rates, a rate-sensitive sector like consumer staples has every reason to outperform. These sectors are high-yielding in nature and should thus perform better in a low-rate environment.

Also, trade tensions between the United States and China are not over yet, thereby raising the appeal for consumer staples stocks. This is because the sector generally acts as a safe haven amid political and economic turmoil. Stocks in these sectors generally outperform during periods of low growth and high uncertainty.

Both parties — the United States and China — will have a discussion at the end of the month at the G20 meet, following which investors may gain definite knowledge about the trade war. If the two parties fail to come to a resolution and tariffs on additional Chinese goods are imposed and retaliated with, we may end up seeing a recession.

Oxford Economics’ a worst-case scenario outlook says that the U.S. economy could slow sharply from the third quarter of this year and then fall into recession. If this happens, there could be a 30% decline in the S&P 500, per an article published on MarketWatch. In such a scenario, we can expect staples stocks to do well.

Investors should also note that U.S. consumer inflation has been contained. The consumer price index inched up 0.1% last month as a rebound in the cost of food was offset by cheaper gasoline. The CPI gained 0.3% in April. Amid such a tepid inflationary scenario, consumers’ demand should be steady, which in turn could push staples stocks and ETFs higher.

ETFs in Focus

Against this backdrop, the following consumer staples ETFs hit lofty 52-week high in recent sessions (see all staples ETFs here).

Consumer Staples Select Sector SPDR Fund (XLP - Free Report) – Up 15.1%

Fidelity MSCI Consumer Staples Index ETF (FSTA - Free Report) – Up 13.5%

John Hancock Multifactor Consumer Staples ETF (JHMS - Free Report) – Up 13.4%

Vanguard Consumer Staples Index Fund ETF Shares (VDC - Free Report) – Up 13.0%

iShares Global Consumer Staples ETF (KXI - Free Report) – Up 8.4%

Will the Rally Last?

Despite their non-cyclical nature, the sector can be under pressure if trade tensions rise. Investors should note that the U.S. staples sector is dependent on China. As many as 11 U.S.-listed consumer staples companies — including Mondelez International Inc (MDLZ - Free Report) and Philip Morris International Inc (PM - Free Report) — are estimated to generate at least one tenth of their sales from China, and six companies are projected to derive at least 5% of their sales in Mexico (another region that the United States is having trade tensions with), per Reuters. So, one may not see a stupendous jump in staples ETFs if there is a trade-war-inflicted recession ahead.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>