Consumer Staples ETFs: No Safety This Year

Consumer staples stocks and the related exchange-traded funds have a reputation for being conservative, often safe investments. That reputation isn't sticking this year. The Consumer Staples Select Sector SPDR XLP, the largest ETF dedicated to the sector, is down more than 11 percent year-to-date.

That loss is more than twice as bad as the next-worst member of the sector SPDR ETF suite. XLP and rival cap-weighted consumer staples are usually heavily allocated to the likes of Procter & Gamble Co PG, The Coca-Cola Co KO and Walmart Inc WMT. Those are three of the 19 members of the Dow Jones Industrial Average that have generated negative year-to-date returns.

What Happened

First-quarter earnings season has been another source of stress for staples stocks.

“Shares of the S&P 500 Consumer Staples Index have lost 4 percent since the beginning of the earnings season,” reports Bloomberg. “That’s roughly the same as the combined losses in five other S&P sectors that have traded to the downside since the earnings season kicked off. The S&P 500 Index has slid 0.2 percent during that time.”

Household products makers and tobacco companies have been among the worst staples offenders this earnings, which is problematic for XLP because the ETF allocates about 30 percent of its roster to those two industries.

Why It's Important

Some analysts are less-than-thrilled with the staples sector. For example, AltaVista Research has an Underweight rating on XLP, which implies rich valuations or below-average appreciation potential.

“Consumer Staples was the worst performing sector in 1Q18, following a poor showing in 2017, reflecting investors' caution on interest rate-sensitive sectors,” said the research firm. “Meanwhile consensus forecasts for faster revenue growth and further margin expansion both this year and next seem optimistic to us. Valuations remain rich in an absolute sense, though P/Es appear to be in a downward trend.”

What's Next

Second-quarter earnings could be potentially trying for staples investors due to the suddenly stronger dollar. The PowerShares DB US Dollar Index Bullish Fund UUP is up nearly 2.5 percent over the past week. That's not good news for multi-national staples companies that generate significant portions of their sales in currencies that aren't the greenback.

Investors have pulled $1.14 billion from XLP this year.

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Photo courtesy of Procter & Gamble.