Don't Ditch Defensive ETFs In Q2

The consumer staples sector and its corresponding exchange traded funds have been dependable to say the least in 2016. Just look at the iShares U.S. Consumer Goods ETF IYK, which has soared nearly nine percent over the past 90 days and recently touched all-time highs.

Naysayers will assert several things about an equity market rally that involves leadership from a boring sector such as consumer staples. As it pertains to 2016, the are likely to assert that staples are rate-sensitive, thereby getting a boost from the Federal Reserve's reluctance to raise interest rates. They would be correct.

Critics would probably also say the low volatility factor's leadership is lifting staples and that the sector is again richly valued relative to the broader market. Right and right, but those arguments do not mean an ETF such as IYK cannot deliver more upside.

“Tailwinds for defensives are still in place: Still low interest rates, high uncertainty about the economy’s strength, weakness from abroad, and a relatively strong dollar — even if its relative appreciation has slowed amid dovish commentary from Federal Reserve Chairman Janet Yellen,” according to a recent BlackRock note. 

Three of the 22 members of the Dow Jones Industrial Average that are higher on a year-to-date basis, are considered consumer staples stocks. Two – Coca Cola Co. KO and Procter & Gamble Co. PG – are IYK's two largest holdings combining for over 18 percent of the ETF's weight.

“Morningstar's equity analysts believe that what drove staples firms' performance last year is the same dynamic that has fueled their valuations during the ultralow-interest-rate environment of the past few years: The sector's healthy dividends have captured the interest of income-seeking investors,” said Morningstar in a recent note.

IYK's trailing 12-month dividend yield of 2.15 percent is 30 basis points above yesterday's closing yield on 10-year Treasurys.

“Also, share buybacks are at notably high levels. Defensive mainstay consumer staples along with technology (technically not a defensive) has accounted for more than half of the recent buybacks, meaning their prices may be supported. (In other words, prices are presumably supported due to supply-and-demand dynamics. Fewer shares available means people pay more to get them,” adds BlackRock.

IYK devotes over half its weight to food, beverage and tobacco stocks. Makers of household and personal products account for over 18 percent of the ETF's weight.