All of us use products like detergents, washing liquids, and paper towels to take care of our household daily. People may go to cinemas less when times get tough, a vacation in a faraway resort may be put off, but there is no question common people will go again for a weekly grocery shopping. Consumer Staples Sector is one of the most resilient during crisis times.
Let’s look at the main groups that belong to this sector.
- Beverages – this is a pretty obvious one. Companies in this group sell drinking water, soft drinks, milk, alcohol. Well, the last one probably isn’t a super essential product, but usually, people can still afford it during the crisis without affecting much the personal finances.
- Food Staples & Retailing – these are drug stores, pharmacies, food retailers, hypermarkets. Businesses in this group are what come to mind when it comes to satisfying the daily needs of typical consumers.
- Food Products – are the suppliers of the food chain: crop growers, food processors, food packagers, juice producers.
- Household products – include products soap, detergents, paper towels, diapers, tissues. We all use them to maintain cleanliness at home.
- Personal Products – these are the products of personal hygiene and care such as shampoo, toothpaste, cosmetics, and perfumes.
- Tobacco – it’s arguably one of the “essential” products for everyday smokers. That include cigarettes, cigars, and vape liquids. Tobacco growers also belong to this group as the suppliers.
The incomes of the groups above would usually come from the products’ profit margins. Companies are motivated to keep the margins wide enough to sustain the growth of their businesses.
Advantages of investing in Consumer Staples
As most of the consumer staple products are easily replaceable, companies are generally motivated to maintain the price and quality of the products. During economic stresses, most of the companies are successful in passing the increasing production cost unto their customers, therefore keeping the stable profit margins. The consumer staples stocks usually offer reliable dividends, however, with limited growth potential. Steady high dividends and well-known brands among the public often push the stock prices higher, making it more difficult to find a reasonable option for a value investor.
During the times of economic crisis, Consumer Staples stocks are some of the most resilient in terms of performance as more investors cling to their stable dividends. Let’s look at the stock chart of the well-known Consumer Staple company – Walmart (NYSE: WMT). In the chart below, we can see the comparison of the stock’s performance with the S&P500 index. Even when the overall market bottomed on March 23 (marked with the green line), in terms of percent change WMT remained just a little below zero, getting back to the positive territory in a matter of weeks.
During the last three recessions or the times of Gross Domestic Product contraction, the Consumer Staples sector outperformed. As the stocks in this sector usually have low volatility, they are considered as “defensive” stocks.
The Major Consumer Staples sector ETFs
If you want to get exposure to the Consumer Staples Sector without delving into discrepancies of the individual stocks, Exchange-traded funds (ETF) can be a convenient option. Let’s look closer at the three biggest Consumer Staples ETFs by their total assets.
- Consumer Staples Select Sector SPDR Fund (NYSE: XLP) – it’s the biggest and quite conservative fund that focuses on large-caps that belong to S&P500. Most of the fund’s holdings are familiar to the common investor. The most significant advantages of the fund are its liquidity, low expense ratios, and solid asset base. The top three companies held by the fund are Procter & Gamble Co – 16.74%, PepsiCo Inc – 10.25%, and Walmart Inc – 9.69%.
- Vanguard Consumer Staples ETF (NYSE: VDC) – The fund is highlighted by its unique asset structure, which avoids excessive concentration and limits fund’s holdings to 100 individual stocks. In general, VDC would fit more an investor who seeks to get exposure to more low-beta assets. The top holdings of the fund are similar to XLP, except Coca-Cola Co. Those are Procter & Gamble Co – 15.27%, PepsiCo Inc – 9.27% and Coca-Cola Co – 9.19%.
- iShares Europe ETF (NYSE: IEV) – This ETF holds the assets from developed European countries. Investors that look for ways to diversify the portfolio regionally can consider IEV as the fund holds stocks in many different economies. The biggest drawback is the ETF’s fees; the competitors like XLP or VDC are more cost-effective than IEV. As there are more companies in IEV’s portfolio, the absolute share percentages of the top three are lower: Nestle SA – 4.10%, Roche Holding AG – 3.02% and Novartis AG – 2.65%.
Let’s compare the dividends and the quarterly performance of the Consumer Staples ETFs with some other sectors in the table below:
|ETF name||Annual dividends||Quarterly performance|
|Consumer Staples Select Sector SPDR Fund||2.68%||5.15%|
|Vanguard Consumer Staples ETF||2.49%||6.08%|
|iShares Europe ETF||3.60%||17.78%|
|S&P 500 Index||1.88%||19.25%|
|Financial Select Sector Index||2.55%||8.98%|
|iShares 1-3 Year Treasury Bond ETF||1.85%||0.01%|
|Utilities Select Sector SPDR Fund||3.29%||4.32%|
How to trade and how to invest in Consumer Staples ETF
If you intend to invest in Consumer Staples ETFs, it would be useful to get the general idea about the fundamentals of the sector leaders, mainly if the target ETF’s holdings include the significant shares of those companies. Some of the essential metrics to pay attention to are organic sales (change in revenue excluding temporary issues), comparable-store sales (related to the growth momentum), and market share. The profits and returns data such as the pace of gross profit margins, operating profit margins and cash returns should be analyzed as well. What matters here is to grasp the overall picture of the sector. If just a few companies in the industry show positive changes in the metrics, the original idea of investing in the Consumer Staples ETF is not viable anymore. The main advantage of the ETF as an asset class is the diversification, so an investor must always focus on utilizing the assets’ strong side. Otherwise, it’s better to invest in individual stocks.
Be the investor by your own choice, not the market’s one!
If you decided to exercise your investment idea, make sure you know the reasons under which you’d cover your position in case things turn sour. Just because your timeframe could be months or even years doesn’t mean you ought to marry your positions forever. When the conditions under which you got in are not there anymore, there is no logical reason to hold the position! Timely cutting your losses can save you capital, time, and keep your investment judgment clear.
Let’s consider an example (see the illustration below). Here we have a chart of XLP. Assume, you had your fundamental reasons in place, and you also received a technical entry signal (green arrow) as the price closed above 100 days Moving Average (orange line) at the beginning of 2019. You’ve been successfully holding the position during the year, and then at the beginning of 2020, the market started to go south. What do you do in this case? Holding on to the position would be rather unwise as you would lose all your yearly price gains. One of the simple exit signals could be similar to your entry but vice-versa, – you cover when the price closes below the Moving Average (red arrow).
Consumer Staples sector plays the role of one of the “safe havens” available during the economic downturns. The sales of the companies in the sector are generally stable, which allows consistent dividend returns, although not extraordinary. There are different ETFs available to express your investment idea; some of them focus on the companies that vary regionally. ETF is a great tool diversify regionally, by capitalization, sub-industries, etc. When investing in the Consumer Staples ETFs, we should weigh the relevant fundamentals for the sector as well. Regardless of kind of investment, you must always control your risk by having an exit strategy, – that will give you the peace of mind and the ability to generate objective investing ideas.