Examining The Safety Of A Popular Staples ETF

Last year, the Consumer Staples Select Sect. SPDR (ETF) XLP climbed 6.9 percent, which was good for the second-best performance among the sector SPDR exchange-traded funds. XLP, the largest consumer staples ETF, trailed only the Consumer Discretionary SPDR (ETF) XLY last year.

Consumer Staples ETF

Although investors are supposedly favoring conservative, low beta fare this year, XLP has traded modestly lower year-to-date. However, investors have displayed some affinity for XLP by allocating nearly $753 million in new money to the ETF this year, which likewise is good for the second-best total among all sector ETFs.

Despite XLP's reputation for consistent dividends, low volatility and relative steadiness in times of market tumult, not all analysts are enthused by the ETF's outlook. In a new research piece, AltaVista Research rates XLP Underweight, a rating that implies below average appreciation potential.

“Typically, funds in this category consist of stocks trading at relatively expensive valuations and/or having below-average fundamentals,” said AltaVista.

Related Link: Dan Nathan's Consumer Staples ETF Trade

A Closer Look At XLP

XLP, home to nearly $8.9 billion in assets under management, allocates over 27 percent of its combined weight to Dow components Procter & Gamble Co PG, The Coca-Cola Co KO and Wal-Mart Stores, Inc. WMT. Exposure to large- and mega-cap companies like those helps drive a weighted average market value of almost $107.8 billion among XLP's 38 holdings.

XLP also sports a better-than-Treasurys 2.54 percent dividend yield and the ETF is home to several dividend aristocrats. However, vulnerability to a stronger dollar cannot be ignored.

“Earnings declined slightly last year as margins got squeezed, in part by the strong USD. Estimates for this year and next look better although the top line seems a bit aggressive to us. In any case Consumer Staples stocks have seen their valuation multiples expand considerably over the last five years and as a result these stocks appear rather expensive, leading to an Underweight recommendation,” said AltaVista.