The fourth-quarter swoon experienced by U.S. stocks sent some investors to defensive sectors, a trend showing some signs of durability early in 2019 even as the S&P 500 rebounds.
Consumer staples stocks are seeing some benefit from investors' defensive leanings. Year-to-date, the Consumer Staples Select Sector SPDR (NYSE: XLP) is up 3.29 percent.
XLP, the largest consumer staples exchange traded fund by assets, slumped 8.1 percent last year as some higher-yielding sectors struggled amid rising interest rates. The fund yields 3.03 percent compared to a dividend yield of just 2.04 percent on the S&P 500.
The $9.71 billion XLP “seeks to provide precise exposure to companies from the food and staples retailing, beverage, food product, tobacco, household product and personal product industries in the U.S.,” according to State Street.
Why It's Important
Consumer staples' recent resurgence is notable because the sector has been out of favor with many investors for nearly three years.
“Consumer Staples has been one of the least-favored sectors since mid-2016, underperforming the broad market by 16% annually as interest rates rose and economic growth accelerated,” State Street said in a recent note. “However, as long-term interest rates have started to head south on the backdrop of decelerating growth prospects, Consumer Staples have played a good defense in the equity market.”
XLP holds 33 stocks with Dow components Procter & Gamble Co. (NYSE: PG) and Coca-Cola Co. (NYSE: KO) combining for over a quarter of the fund's weight. If the Federal Reserve holds off on raising interest rates this year, as some bond market observers believe will be the case, XLP could benefit.
“Tsector’s relative performance to the broad market has moved in the opposite direction of long-term yields. Since December 2007, the Consumer Staples sector outperformed the broad market by 0.95% on a monthly average two-thirds of the time when yields on the 10-year Treasury fell,” according to State Street.
XLP and rival consumer staples ETFs are about to face a raft of earnings tests. For the week starting January 28 through February 15, about half of the components in XLP's underlying index will report earnings.
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