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Valuations Still High in Consumer Staples: 6 ETFs to Shun

Sanghamitra Saha

The investing scenario in the United States is a little tricky now. Global growth worries have led several central banks from the developed markets to adopt an easy monetary policy, which in turn has resulted in subdued dollar and Treasury bond yields. This should make a great investing scenario for Consumer Staples stocks and ETFs.

Why Staples Stocks Underperformed Despite Low Rates?

With falling rates prevailing the market, investors might think rate-sensitive sectors like consumer staples and utility will outperform. These sectors are high-yielding in nature and should thus perform better in a low-rate environment.

But contrary to the trend, some of the sector ETFs have fallen behind the S&P 500 though the Fed has taken a patient stance from the start of 2019. Easing trade tensions between the United States and China, delayed Brexit, uptick in Chinese manufacturing sector and cheap money inflows from a dovish Fed boosted investors’ risk appetite and put this safe sector in the back burner.

Valuation of Staples Segment Pricier

The consumer staples segment is up 13% this year while the S&P 500 composite Equal ETF has added about 17.4%.

The road ahead also seems rocky for the segment as valuations are still pricier. P/E (ttm) of the segment is 21.3x versus 19.8x of the S&P 500 equal ETF. Forward P/E ratio is 19.1x versus 18.8x of the S&P 500 counterpart. P/FCF of the segment is 68.8x versus 26.1x held by the S&P 500.

P/B ratio is also pricier for the segment at 12.6 against 4.7x reflected by the S&P 500 equal ETF. So is price/sales ratio which stands at 11.2x for the staples segment versus just 3.0x recorded by the said S&P 500 fund.

ETFs to Avoid

Against this backdrop, investors can stay away from the below-mentioned ETFs. These ETFs have a Zacks Rank #4 (Sell).

John Hancock Multifactor Consumer Staples ETF JHMS

The fund follows an index, which is classified according to their market capitalization, relative price, and profitability, and are weighted accordingly in favor of smaller, less expensive, more profitable companies. It yields 2.69% annually and charges 40 bps in fees (read: Wal-Mart's Solid Q4 Results Drive Consumer ETFs Higher).

Invesco S&P 500 Equal Weight Consumer Staples ETF RHS

The 33-stock fund does not put more than 3.80% weight in a stock. The fund charges 40 bps in fees and yields 2.35% annually.

First Trust Nasdaq Food & Beverage ETF FTXG

The underlying index is a modified factor weighted index, designed to provide exposure to U.S. companies within the food and beverage industry. The fund charges 60 bps and yields 1.26% annually (read: 4 Best-Performing Sector ETFs of March).

iShares U.S. Consumer Goods ETF IYK

The 109-stock fund is heavy (12.2%) on Procter & Gamble. Coca-Cola (8.39%) and Pepsico (7.98%) take the next two spots of the fund. It charges 43 bps in fees and yields 2.41% annually (read: Altria-Juul Tie-Up News Puts Consumer Staple ETFs in Focus).

Invesco Dynamic Food & Beverage ETF PBJ

These are companies that are principally engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies. Starbucks (5.33%), Yum! Brands (5.25%) and Mondelez International (5.05%) are the top three holdings. It charges 63 bps in fees and yields 1% annually. It charges 63 bps in fees and yields 1.00% annually.

First Trust Consumer Staples AlphaDEX Fund FXG

The underlying index selects stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology. The fund charges 64 bps in fees and yields 2.30% annually.

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Invesco Dynamic Food & Beverage ETF (PBJ): ETF Research Reports
 
Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS): ETF Research Reports
 
First Trust Consumer Staples AlphaDEX Fund (FXG): ETF Research Reports
 
iShares U.S. Consumer Goods ETF (IYK): ETF Research Reports
 
John Hancock Multifactor Consumer Staples ETF (JHMS): ETF Research Reports
 
First Trust NASDAQ Food & Beverage ETF (FTXG): ETF Research Reports
 
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