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Consumer Staples Play: VDC Or FXG?

Cinthia Murphy

Consumer staple stocks have been leading the nine sectors comprising the S'P 500 in the past month, gaining momentum in the face of relatively stable commodity prices and an overall U.S. economy that continues to expand, even if slowly.

As the name suggests, consumer staples consists of companies that provide goods and services people need both in good times and in bad, meaning the sector’s performance is not that sensitive to economic cycles. In fact, consumer staples are often looked at as relatively safe stocks, particularly in times when risk aversion is running high.

But in the past month, consumer staples stocks have tacked on gains of 7 percent, leading the S'P 500 to gains of 4.2 percent in that same period. That’s the best-performing S'P sector in the last 30 days.

However, year-to-date data show that consumer staples, as a sector, hasn’t really stood out in 2013. On the contrary, so far this year, consumer staples have performed largely in line with the broad stock market, currently ranking fifth among the S'P 500’s nine sectors, with gains of 23.5 percent year-to-date. But some believe more gains could lie ahead.

“During the past few months, there have been signs that the global economy will continue its modest growth trends, with some signs of improvement in foreign developed markets and potential stabilization in China,” Robert Lee, portfolio manager at Fidelity, said in a recent research note. “An environment featuring stable global economic growth tends to be favorable for the sales and earnings outlook for consumer staples companies.”

Indeed, Lee pointed out that despite the negative impact of a stronger U.S. dollar on these companies’ bottom lines, overall “business conditions” remain favorable for the sector going forward.

ETF investors looking to tap in to U.S. consumer staple stocks have 11 ETFs to choose from, with combined assets of more than $10 billion. Three of them serve up the closest you can get to pure sector exposure, while the remainder offer alternative takes on the sector.

The biggest of them all is also the veteran in the space, the Consumer Staples Select SPDR ( XLP | A-91 ), with $7 billion in assets. Launched in 1998, XLP costs 0.18 percent a year, or $18 for every $10,000 invested, and its massive liquidity keeps trading spreads narrow, at only 2 basis points on a 60-day average—making it one of the cheapest funds in the segment.


Chart courtesy of StockCharts.com


To be sure, XLP, which tracks a market-cap-weighted index of consumer staples stocks drawn from the S'P 500, is far cheaper—and more liquid—than iShares’ U.S. Consumer Goods ETF ( IYK | B-80 ), which has $470 million in assets and charges 0.46 percent a year. IYK trades with an average spread of 6 basis points.

While both funds set out to serve “plain vanilla” exposure to consumer staple stocks, IYK’s portfolio favors midcaps, making it a tad riskier, as seen in its higher beta. And despite its much-bigger portfolio comprising 118 names—as compared with XLP’s 40 holdings—IYK excludes Walmart, a company that some investors consider a consumer staple stock and some don’t.

That’s significant because Walmart is a $251 billion company that has rallied more than 6 percent in the past month alone, and about 12 percent year-to-date. XLP allocates nearly 8 percent of its portfolio to Walmart.

However, it's the Vanguard Consumer Staples ETF ( VDC | A-93 ) that may offer the best pure-play exposure to the sector. The fund, which is the second-largest consumer staples ETF , with $1.6 billion in assets, tracks a market-cap-weighted index of consumer staple stocks in a portfolio comprising 109 names, including Walmart, with a 7.3 percent weighting.

VDC costs a competitive 0.14 percent a year, and its liquidity keeps its average trading spread at about 5 basis points, putting its overall cost of ownership closer to XLP’s, but the fund is still the cheapest in the segment—at least for now.

That’s because the newcomer Fidelity MSCI Consumer Staples ETF ( FSTA ) came to market three weeks ago, with an expense ratio of 0.12 percent—the lowest in the segment. But as we know, the true cost of owning an ETF goes beyond expense ratios alone, and in FSTA’s case, the fund is currently trading with an average spread of 9 basis points, putting its overall cost of ownership at about 0.21 percent.

To be fair, the fund is new on the market, having launched on Oct. 23, so investor demand and true trading costs have yet to be seen, and the general rule of thumb is that the higher the demand, the tighter the spreads. The ETF owns 107 names

Finally, ranking as the third-largest consumer staples ETF in the market today is the First Trust Consumer Staples AlphaDex ( FXG | B-53 ), with $857 million in assets.

FXG is anything but plain vanilla, which in this case translates into significant outperformance for a significantly higher cost. The fund comes with an expense ratio of 0.70 percent a year—the highest in the segment—and trades on average with a 7 basis-point spread, meaning investors are shelling out closer to $77 per $10,000 invested to own it. That’s more than three times the cost of VDC, for instance.

What’s unique about FXG is that it tracks an index of large- and midcap U.S. consumer staples stocks that relies on a multifactor selection process designed to exclude underperforming stocks. It then applies a tiered equal-weighting methodology to the holdings. In the end, FXG is a portfolio that carries a strong tilt toward midcaps—read “risk”—and a focus on food stocks and other subsectors.

In all, the fund, which owns 36 stocks, has outperformed the broader consumer staples segment by at least 10 percentage points year-to-date.


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