Consumer Staples ETFs Try to Shake Laggard Ways
This article was originally published on ETFTrends.com.
Consumer staples stocks and the related exchange traded funds have been anything but safe this year. For example, the Consumer Staples Select SPDR (XLP) , the largest ETF tracking the consumer staples sector, is down more than 11% year-to-date.
Recently, some marquee names in XLP and other cap-weighted staples ETFs have languished amid disappointing earnings reports and analyst downgrades.
“Last week was a tough one for consumer-staples stocks, with the Consumer Staples Select Sector SPDR ETF (XLP) losing nearly 3% on Thursday alone,” reports Teresa Rivas for Barron's. “The sector was hit from all sides, with disappointing tobacco volumes from Philip Morris International (PM), lackluster organic-sales growth guidance from Procter & Gamble (PG), as well as plenty of downgrades, for companies including Kraft Heinz (KHC), Smucker (SJM), and Campbell Soup (CPB).”
Contracting Multiples for Staples
Currently, staples stocks sport valuations on par with the S&P 500, but some analysts believe the sector's multiples could contract by a significant margin.
Credit Suisse's Robert Moskow writes, "that in recent history, staples' premium valuations were an anomaly, driven by the Great Recession and a period of extremely low global interest rates that made their dividend yields more attractive,” according to Barron's. “However, take a step back, to 1999-2000 and 2001-2003, and staples 'traded at a pretty hefty discount,' thanks to rising interest rates and the rotation into tech in the first period and major reinvestments and consolidations in the second.”
Related: Talking ETF Turnover
With higher beta, cyclical sectors leading U.S. equity markets higher this year, some defensive sectors are lagging. In the current environment, interest rates are rising, which can weigh on staples, a sector known to be rate-sensitive. Additionally, investors are overtly favoring the technology sector.
Staples stocks are comparably valued to their consumer discretionary peers, but some market observers argue that possible increases in household debt would make staples more attractive while wage growth would likely benefit both consumer sectors.
Rivals to XLP include the Vanguard Consumer Staples ETF (VDC) and the Fidelity MSCI Consumer Staples Index ETF (FSTA).
For more information on the consumer sector, visit our consumer staples category.
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