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Consumer ETFs in Focus on Muted PG Earnings

Zacks Equity Research

Last week, Procter & Gamble (PG) reported a mixed bag second quarter 2014 with earnings surpassing the estimate by a penny and the top line missing by a whisker. In addition, the retention of full fiscal 2014 outlook also failed to arouse optimism among investors.

Procter & Gamble's 2Q14 Earnings in Focus
The consumer staple giant’s 2Q14 adjusted earnings of $1.21 per share (excluding restructuring charges) slipped 1.0% year over year hurt by steeper-than-expected currency concerns but beat the Zacks Consensus Estimate by a penny.  Excluding currency headwinds, earnings increased 8% in the quarter buoyed by cost savings and lower taxes that compensated for sluggish margins.

Net sales were flat year over year at $22.28 billion due to a 3% headwind from currency and to add to the concern, slightly missed the Zacks Consensus Estimate of $22.34 billion. With around 60% of the company’s business generated outside North America, a strong dollar marred the value of international sales.  However, organic revenues (excluding the impact of acquisitions, divestitures and foreign exchange) grew 3.0% on volume expansion and pricing gain.

As far as the outlook is concerned, there was not much spark. Management essentially reiterated its 2014 guidance.

Management indicated that currency headwinds will likely subside as the year progress and earnings will improve in the second half helped by better productivity gains and cost savings.

Market and ETF Impact
P&G has sizable exposure (more than 10%) in consumer staples funds like Consumer Staples Select Sector SPDR Fund (XLP), Vanguard Consumer Staples ETF (VDC) and iShares Dow Jones US Consumer Goods Sector ETF (IYK). This suggests that the performance of the fund is highly dependent on P&G’s performance (read: A Comprehensive Guide to Consumer Staples ETFs).

Thanks to the not-so-inspiring earnings, P&G’s shares were slightly down on the day of the earnings release and so were the funds’ performances. P&G currently holds a Zacks Rank #3 (Hold).

Amid such a backdrop, if investors still seek a touch of consumer staples in their portfolio they might consider the following ETFs to minimize the risk emanating from single stock investing (see all the Top Ranked ETFs here).

Consumer Staples Select Sector SPDR Fund (XLP)

The most popular consumer ETF on the market, XLP follows the S&P Consumer Staples Select Sector Index. The fund invests about $6.65 billion of assets in 42 holdings. Of these firms, the in-focus P&G takes the first spot, making up roughly 13.75% of the assets.

In terms of sector exposure, the fund is skewed toward food & staples retailing which makes up for one-fourth share, closely followed by household products (21.07%) and beverages (20.15%).

The fund charges 18 bps in fees per year from investors. The fund returned over 26.0% in 2013. XLP currently has a Zacks ETF Rank of 4 or ‘Sell’ with a ‘Low’ risk outlook (read: 3 Sector ETFs to Avoid as Interest Rates Rise).

Vanguard Consumer Staples ETF (VDC)

This fund manages a $1.61 billion asset base and provides exposure to a basket of 111 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. The product charges a low fee of 14 bps per year from investors.

Again here, P&G is the top firm with 12.1% allocation. The product is widely spread across household products, soft drinks, packaged foods & meat, tobacco and hypermarkets & super centers, as each makes up a double-digit allocation in the fund.

VDC added 28.0% in 2013. The fund has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘Low’ risk outlook.

iShares Dow Jones US Consumer Goods Sector ETF (IYK)

This ETF tracks the Dow Jones U.S. Consumer Goods Index, giving investors exposure to the broad consumer staples space. The fund holds about 119 stocks in its basket with AUM of $440.8 million while charging a slightly higher fee of 45 bps per year from investors.

Like the other two, the stock-under-consideration Procter & Gamble occupies the top position in the basket with 11.47% of assets. However, the fund is widely diversified across sectors as none of them make up for more than 18% of IYK.

The fund was up about 30% in 2013. The product has a Zacks ETF Rank of 3 with a ‘Medium’ risk outlook.

Bottom Line

Investors should note that consumer staples will likely remain a subdued sector this season with earnings growth expected to slow down 0.3% but resume from the upcoming quarter as per the Zacks Earnings Trend.

There is only a little glitch for the sector giants like P&G that are extensively focused on international currencies. As soon as the Fed speeds up its QE tapering anytime this year, we are likely to see more strength in the greenback which is going to cut back these companies’ profits.

So, investors are advised to take a closer look at the currency movement before investing such companies or relevant ETFs, and make sure to watch for any changes in guidance as we get further into 2014 (read: Follow Warren Buffett in 2014 with These Sector ETFs).

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