Staples ETFs Offering Protection In Turbulent Markets

The Utilities Select Sector SPDR XLU is the only one of the sector SPDR exchange traded funds higher on a year-to-date basis, but the Consumer Staples Select Sector SPDR XLP is not far behind with a barely noticeable 2016.

The last couple of days of market action aside, leadership from ETFs such as XLP and XLU generally is not considered encouraging regarding risk appetite, but these shelter from the storm plays are what's working this year and that trend could continue as Treasury yields move lower.

Data indicate advisors and investors are clearly enthusiastic about consumer staples stocks and ETFs this year. Year-to-date, XLP has added nearly $965 million in new assets. Among sector ETFs, only XLU has outpaced XLP's 2016 inflows. 

“Consumer staples stocks, which generally sport above-average dividend yields and have consistent earnings records, have been a bright spot in the U.S. equity market the last two years. After rising 6.6% in 2015, the total return for the S&P 500 consumer staples sector was just -0.8% year to date through February 12 in contrast to the 8.5% decline for the broader index,” said S&P Capital IQ in a new research note. 

Further underscoring investors' preference lower beta sectors this year, XLP is handily outperforming its discretionary rival, the Consumer Discretionary Select Sector SPDR XLY. Interestingly, each of the four members of the Dow Jones Industrial Average that are members of XLY's lineup are among the 24 Dow stocks lower on the year. Conversely, three of the six Dow stocks in the green are XLP holdings. 

“S&P Global Market Intelligence has stock recommendations on 60 U.S. consumer staples companies, 26 of which were buys or strong buys. Among sub-industries, packaged food & meat companies were one that was well represented; eight companies were buys or strong buys,” said the research firm. “While Joseph Agnese, S&P Global Market Intelligence consumer staples equity analyst, sees some currency headwinds impacting revenues, cost savings should help boost 2016 earnings for some companies in the sub-industry.”

S&P Capital also highlighted the First Trust Consumer Staples AlphaDEX Fund FXG. FXG is a different beast than XLP as the latter weighs its holdings based on a combination of growth and value factors.

As a smart beta ETF, FXG has the potential to outperform rival staples ETFs in strong bull markets, something the fund has previously done, but the current market environment is revealing some of the disadvantages associated with alternative weighting methodologies at the sector level as FXG is down more than one percent this year.

XLP and FXG rank favorably due to low risk considerations regarding the ETFs' holdings, said S&P Capital IQ.