Giving Consumer Staples ETFs Another Chance

The consumer staples sector's 2018 woes are well-documented, but fresh data points underscore the sector's struggles.

Last Friday, the Consumer Staples Select Sector SPDR XLP, the largest exchange traded fund tracking the sector, fell 0.62 percent. That may not sound like much, but it extends XLP's year-to-date loss to over 13.5 percent, putting the fund about 16.6 percent below its 52-week high.

What Happened

The culprits behind the sector's struggles are in plain sight, including rising Treasury yields, a stronger dollar and some slumping emerging markets currencies. The latter two points are relevant because many big-name staples companies, such as XLP components Coca-Cola Co. KO and Procter & Gamble PG, generate significant portions of their sales in ex-U.S. markets.

“From the January peak to the May trough, the S&P 500 Consumer Staples sector dropped 17.55 percent. Currently, the sector is down 15 percent from the January high. There are only four other occurrences where staples dropped 17 percent or more in such a short period," Rareview Macro founder Neil Azous said in a Friday note.

Why It's Important

It will take more than those aforementioned declines to get market participants to renew their interest in the staples sector, but as Azous said, one catalyst may be lingering.

One such catalyst, in our opinion, would be a turnaround in emerging markets,” he said. “Why? Because staples companies sell a lot of products currently to countries where their currencies are under significant pressure. Put another way, if Proctor & Gamble sells Head & Shoulders shampoo to Argentina, for now, P&G might as well write off that revenue stream.”

Among the 11 S&P 500 sectors, staples rank seventh based on sales-weighted average of revenue generated in the U.S.

What's Next

For those interested in playing a historical analog with a catalyst, six-to-nine-month 1x2 upside call options in the XLP ETF should be appealing, especially since they carry well (i.e., negative theta),” Azous said. 

Since the start of the second quarter, investors have pulled $944.31 million from XLP, a total exceeded by just two other ETFs.

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