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Consumer Staples ETFs Beating Discretionary ETFs: Why?

Sanghamitra Saha

The consumer staples sector has been an area to watch lately given that a host of related ETFs are at a 52-week high. The largest staples ETF Consumer Staples Select Sector SPDR Fund XLP is up 6% in the past three months, leaving behind the S&P 500’s 2.6% gains and Consumer Discretionary Select Sector SPDR Fund’s XLY 2.2% rise. The trend has been similar in the past one month as well. XLP (up 3.5%) has beaten both XLK (up 2.2%) and the S&P 500 (up 1.9%). Let’s find out what’s driving the rally.

Global Growth Concerns & Easy Money Policy

Trade war tensions and the resultant global growth worries have led several central banks from the developed markets to adopt an easy monetary policy, which in turn has resulted in a subdued dollar and Treasury bond yields. This should make a great investing scenario for Consumer Staples stocks and ETFs.

There is speculation that the Fed could cut rates this month. With falling rates, a rate-sensitive sector like consumer staples has every reason to outperform. These sectors are high-yielding in nature and should thus perform better in a low-rate environment.

Investors should note that the ECB is also mulling over the possibility of further low rates. Several other global central banks have also exercised such moves in the past three months (read: Global Policy Easing Cycle Set in Motion: ETFs to Win).

Safe-Haven Appeal Amid Trade Tensions

Also, trade tensions between the United States and China are not over yet, thereby raising the appeal for consumer staples stocks. This is because the sector generally acts as a safe haven amid political and economic turmoil. Stocks in these sectors generally outperform during periods of low growth and high uncertainty.

Decent Earnings Releases

About 42.5% of the Consumer Staples market cap in the S&P 500 has so far come up with Q2 earnings releases. The reported companies registered 1.4% growth in earnings on 5.1% higher revenues.  Beat ratios have been solid with 88.9% of the companies surpassing earnings estimates and 55.6% beating on the top line. On the other hand, 30.6% of discretionary companies that has already reported earnings saw a 5.8% decline in the bottom line on 5.6% higher revenues, per the Earnings Trends issued on Jul 24, 2019.

ETFs in Focus

Against this backdrop, the following consumer staples ETFs have gained considerable returns in the past month (see all staples ETFs here).

iShares Evolved U.S. Consumer Staples ETF (IECS) – Up 4%

Fidelity MSCI Consumer Staples Index ETF (FSTA– Up 3.6%

XLP – Up 3.5%

Vanguard Consumer Staples Index Fund ETF Shares (VDC– Up 3.4%

John Hancock Multifactor Consumer Staples ETFJHMS – Up 3.3%

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Vanguard Consumer Staples ETF (VDC): ETF Research Reports
 
Consumer Discretionary Select Sector SPDR Fund (XLY): ETF Research Reports
 
Fidelity MSCI Consumer Staples Index ETF (FSTA): ETF Research Reports
 
Consumer Staples Select Sector SPDR Fund (XLP): ETF Research Reports
 
iShares Evolved U.S. Consumer Staples ETF (IECS): ETF Research Reports
 
John Hancock Multifactor Consumer Staples ETF (JHMS): ETF Research Reports
 
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