Consumer Staples ETFs Losing Defensive Allure

ETF Trends

Consumer staples exchange traded funds were an investor favorite most of 2012 and for the first half of this year. The overall economic picture is changing and will leave a less favorable outlook for this slow-growth sector going forward.

“The group of consumer staples stocks in the S&P 500 generated a total return of 15.15% in the first 6 months of 2013, outperforming the 13.58% of the broader index. In June alone, staples stocks had a negative total return of 0.25% but this was still better than the negative 1.34% for the S&P 500,” S&P Capital said in a recent note. [Cyclical Sector ETFs Can Perform in a Rising Rate Environment]

For the remainder of 2013, the fundamentals are mixed for the staples group of stocks. A higher interest rate environment could reverse any appeal of the yield generated by staples stocks. Furthermore, the revenue growth from large-cap stocks in developed market such as the U.S. is expected to be modest, with most of the faster growth expected overseas. [Sector ETF Technical Outlook]

The dividend yield generated by the consumer staples sector is still higher than the S&P 500, and presents less volatility than most. The fact that shareholders receive cash back in dividends is a huge advantage, S&P Capital wrote in a recent note. The sector is expected to reports decent second quarter earnings based on moderated commodity prices, restructuring and cost reductions and stock repurchase activity. [Defensive Consumer Staples for Yield]

“Though consumer staple companies, due to their defensive nature, are much less exposed to changes in income, they are still impacted when consumer confidence drops or income declines. In such a scenario, consumers buy staples but prefer cheaper brands, which hurts the profitability of the sector,” Zacks Equity Research wrote in a recent article.

Consumer staples ETFs:

  • Vanguard Consumer Staples Index Fund (VDC)
  • iShares S&P Global Consumer Staples (KXI)
  • iShares Dow Jones US Consumer Goods (IYK)
  • iShares MSCI ACWI ex US Consumer Staples Sector Index Fund (AXSL)

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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