Consumer Staples ETFs Leave Investors Hungry In 2017

The consumer staples sector is going to leave investors wanting more when 2017 ends. Just look at the Consumer Staples Select Sector SPDR XLP. XLP, the largest consumer staples exchange traded fund, is going to finish 2017 with a gain of around 10 percent, give or take a few basis points.

Double-digit gains are nice, but the S&P 500 is outpacing XLP by an almost 2-to-1 margin. XLP is home to three members of the Dow Jones Industrial Average: Procter & Gamble PG, Coca-Cola Co. KO and Wal-Mart Stores Inc. WMT. Walmart is the only member of that trio that is among the 16 Dow stocks with year-to-date gains of 20 percent or more. As is often the case, the sector is seen as slightly overvalued relative to the broader market.

“Consumer defensive valuations strike us as a touch inflated, with the sector trading at about a 2-percent premium to our fair value estimates on a market-cap-weighted basis,” said Morningstar. 

Growing Anxious

Some data points suggest investors are getting jittery with staples stocks. For the week ending Dec. 27, investors yanked nearly $239 million from XLP, a total surpassed by just seven other ETFs. Still, XLP has added $549 million in new assets on a year-to-date basis.

XLP allocates a quarter of its weight to beverage stocks and 20.4 percent to household products makers. Food retailers and producers combine for 36.5 percent of the ETF's weight. Several XLP components, including PepsiCo Inc. PEP and Mondelez International Inc. MDLZ, are considered wide moat firms by Morningstar.

We expect PepsiCo and Mondelez will continue to exploit their large, established direct-store delivery networks to leverage relationships with retailers and ensure product quality doesn't falter (particularly given its chips and cookies may not be handled as gingerly through the multiple touch points of a retailer's warehouse distribution),” said the research firm.

Other Challenges

The consumer staples sector faces an array of challenges, including shifting consumer preferences. Some consumers are looking to save money by shifting down to generic brands while others are trading up to smaller, but pricier artisan and craft fare.

Additionally, the consumer staples sector lagged the broader market this year while the dollar was one of the worst-performing major currencies. If the dollar moves higher next year, large-cap staples names could be pinched because many derive significant portions of their revenue from markets outside the U.S.

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