Staples ETFs Miss Out On Some Pension Help

The Consumer Staples Select Sect. SPDR (ETF) XLP and other traditional consumer staples exchange-traded funds have recently been scuffling on concerns that the sector is pricey on valuation and in anticipation of the Federal Reserve's first interest rate hike of 2016.

The Fed proceeded with its first and only interest rate hike of the year last Wednesday, but XLP has climbed more than half a percent over the past week and is higher by about 3.7 percent this month. Still, XLP and rival staples ETFs missed out some potential, albeit modest upside on Monday after a major public pension plan opted to stay away from tobacco investments.

Pensions' Role

On Monday, the investment committee for the California Public Employees' Retirement System (CalPERS), the largest public pension plan in the United States, not only opted against getting involved with tobacco stocks again, it extended its ban on such investments to affiliate funds. CalPERS divested its tobacco investments in 2000. To the pension provider's credit, it acknowledged “tobacco restrictions reduced portfolio returns by approximately $3 billion between 2001 and 2014.”

An op-ed in the Los Angeles Times put the number closer to $3.7 billion.

Pension And Tobacco

CalPERS has also decided to ban tobacco investments for affiliate funds.

“CalPERS' Affiliate Funds include the Judges' Retirement System Fund, the Judges' Retirement System II Fund, the Legislators' Retirement System Fund, the Public Employees' Health Care Fund, Supplemental Income Plans, the Public Employees' Long-Term Care Fund, and the California Employers' Retiree Benefit Trust Fund,” according to a statement.

The CalPERS decision is relevant to XLP and comparable ETFs because XLP, the largest consumer staples ETF by assets, allocates 16.9 percent of its weight to tobacco stocks. That makes tobacco the ETF's fourth-largest industry weight. Phillip Morris International Inc. PM and Altria Group Inc MO are XLP's third- and fourth-largest holdings respectively.

CalPERS “decided in April 2016 to request a review of the current tobacco restrictions. The resulting staff review examined the tobacco restrictions through multiple lenses encompassing a wide range of differing perspectives,” the pension provider said.

Some staples ETFs that use smart beta strategies also have significant tobacco exposure. For example, the PowerShares Dynamic Consumer Sta. (ETF) PSL, which uses a momentum strategy, has a 12.3 percent weight to tobacco names.

Non-Tobacco Holding Staples ETFs

However, not all staples ETFs feature significant tobacco exposure. The First Trust Cnsumer Stapl Alpha Fd (ETF) FXG, which focuses on “growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust, only has a 4.7 percent tobacco weight.