Staples ETFs Down After P&G Misstep

Shares of Dow component Procter & Gamble PG, the world's largest consumer products company, are plunging by more than 4.5 percent Wednesday after the company forecast fiscal fourth-quarter earnings of 69 to 77 cents a share, below the 82 cents analysts are expecting. Emerging markets weakness is one reason for the disappointing outlook and while P&G's third-quarter results beat Wall Street estimates, revenue was light at $20.598 billion. Analysts expected $20.73 billion and the EPS beat appears attributable to cost savings more than other factors. P&G's Wednesday woes have trickled over to rivals such as Colgate-Palmolive CL, Kimberly -Clark KMB and Clorox CLX. Shares of Colgate-Palmolive are lower by more than two percent while Kimberly-Clark is off 1.2 percent. Clorox is down nearly 1.7 percent. Predictably, those glum performances are weighing on consumer staples ETFs a group of funds that have been market leaders for not just this year, but three years. The Consumer Staples Select SPDR XLP is down nearly 1.1 percent Wednesday, not surprising given that the ETF allocates 13.9 percent of its weight to P&G. Colgate-Palmolive is also a top-10 XLP holding with a weight of 3.4 percent. Kimberly-Clark and Clorox combine for about 3.6 percent of XLP's weight. The Vanguard Consumer Staples ETF VDC is off by about one percent. VDC, XLP's chief rival, allocates 12.1 percent to P&G and 3.4 percent to Colgate-Palmolive. Kimberly-Clark is that ETF's eleventh-largest holding. The iShares Dow Jones U.S. Consumer Goods Sector Index Fund IYK is down 0.83 percent. That ETF devotes about 12.3 percent to P&G and 2.9 percent to Colgate-Palmolive. IYK, which has more of a discretionary feel to it than XLP or VDC by virtue of allocations to stocks such as Ford F and Nike NKE, allocates a combined 2.9 percent of its weight to Kimberly-Clark and Clorox. While today's performances for XLP and friends do not qualify as deep pullbacks, it is worth noting these funds remain pricy on a valuation basis. XLP has a P/E ratio of 17.78 and a price-to-book ratio of 3.88, according to State Street data. IYK trades at almost 21 times earnings with a price-to-book ratio of 6.47, according to iShares data. By comparison, the SPDR S&P 500 sports a P/E of just over 14 and a price-to-book ratio of 2.25. Indeed, staples ETFs do look pricey compared to the broader market and higher growth sectors such as technology. The Technology Select Sector SPDR XLK has a P/E of just over 13, but there a case can be made that Wednesday's declines in staples ETFs are just a blip before the funds and their constituents continue to grind higher. Investors have shown a willingness to pay up to play defense over the past few years. That has translated to an overt lover affair with low volatility/low beta sectors and ETFs. Additionally, slumping commodities prices could be another positive catalyst for staples stocks and ETFs. Bottom line: P&G and friends may be down Wednesday, but they certainly are not out. For more on ETFs, click here.