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An Upgrade For A Defensive Sector

ETF Professor

Defensive sectors and the related exchange traded funds have recently been strutting their stuff. Over the past six months, the previously downtrodden consumer staples sector is easily outpacing the broader market.

During that period, the Consumer Staples Select Sector SPDR (NYSE: XLP) is up almost 8 percent while the S&P 500 is up just 0.4 percent.

What Happened

With consumer staples and other defensive sectors trending higher, CFRA Research recently upgraded some defensive groups. The research firm lifted its rating on consumer staples to Market Weight from Underweight.

“With recent readings on inflation moderating and expectations for it to remain that way through 2019, CFRA Investment Strategist Lindsey Bell believes the sector will be under less margin pressure than before,” said CFRA's Director of ETF & Mutual Fund Research Todd Rosenbluth in a Monday note.

Consumer staples is the S&P 500's seventh-largest sector weight, accounting for 7.53 percent of the benchmark U.S. e index as of Dec. 7.

Why It's Important

The Consumer Staples Select Sector SPDR, the largest staples ETF by assets, provides “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.

Procter & Gamble (NYSE: PG), Coca-Cola Co. (NYSE: KO) and PepsiCo Inc. (NASDAQ: PEP) combine for about 31 percent of XLP's roster.

CFRA has Buy or Strong Buy ratings on 16 large-cap, domestic staples names including PepsiCo and Wal-Mart Inc. (NYSE: WMT).

“Given the diversification of industry groups, investors may prefer an index-based ETF to gain exposure to the consumer staples sector,” said Rosenbluth.

What's Next

With expectations in place for slower global economic growth next year, investors may continue leaning toward defensive, higher-yielding sectors like consumer staples. A weaker dollar could help the export-heavy sector's prospects in the new year. XLP has a trailing 12-month dividend yield of 2.74 percent.

CFRA has an Overweight rating on XLP.

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