Big Things In A Small Package For This Staples ETF

Before proclaiming consumer staples stocks as boring and small-caps as disappointing to this point in 2016, have a look at the PowerShares S&P SmllCp Csmr Stpls Pfo PSCC.

The PowerShares S&P SmallCap Consumer Staples Portfolio is small-cap cousin of the popular Consumer Staples Select SEct. SPDR (ETF) XLP. Whereas XLP's holdings are pulled from the S&P 500, PSCC's 15 holdings are the consumer staples members of the S&P SmallCap 600 Index.

Love Those Staples

Not surprisingly, the differences between a staples ETF that holds lower beta fare such as Procter & Gamble Co PG and The Coca-Cola Co KO and one where the holdings' average market cap is $1.6 billion (just a few days of work for P&G or Coke), are significant. With staples stocks in style this year, PSCC has delivered better than triple the returns of XLP, while trouncing the S&P SmallCap 600 and the Russell 2000.

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Underscoring the bullishness surrounding PSCC this year, the fund was one of just four ETFs to hit all-time highs Tuesday. PSCC did so on volume that was more than seven times the daily average. Up more than 14 percent year-to-date, or more than quadruple the S&P 600's returns, more gains could be on the way for PSCC.

“Although adverse foreign currency exposure will limit EPS growth in 2016, to just 2.6 percent, we expect currency pressures to moderate as the year progresses. Third and fourth quarter 2016 growth, according to Capital IQ consensus, is projected to be 6.3 percent and 9.7 percent,” said S&P Capital IQ in a note out earlier this month.

Good Doesn't Equal Perfect...

However, PSCC is not perfect. A 12-month distribution rate of just 1.24 percent is below what XLP investors find and well below what investors are accustomed to with large- and mega-cap staples names. Plus, PSCC has some concentration risk with just 15 holdings compared to nearly 40 for XLP. Nearly two-thirds of PSCC's weight is allocated to food products manufacturers. Just three stocks — B&G Foods, Inc. BGS, Darling Ingredients Inc DAR and Sanderson Farms, Inc. SAFM — combine for over 41 percent of PSCC's lineup.

Still, there is potential for some of PSCC's holdings to be takeover markets, particularly when considering the ETF's small average market cap, highlighting PSCC's utility as a complement to a diversified, large-cap staples ETF.