This article was originally published on ETFTrends.com.
Consumer staples stocks and the related exchange traded funds have had some struggles this year, but the group has recently shown some signs of life. For example, the iShares Dow Jones U. S. Consumer Goods Sector Index Fund (IYK) is up more than 1% over the past month.
The 18-year-old IYK tracks the Dow Jones U.S. Consumer Goods Index and features modest exposure to consumer discretionary and technology names as well as defensive consumer staples stocks.
“Consumer discretionary ranks among top-performing sectors globally this year while consumer staples falls near the bottom despite a summer rally. We attribute staples’ recent out-performance to investors closing their underweight positions,” said BlackRock in a recent note. “Earnings revisions appear to have bottomed, which could provide support into year-end. Yet staples are not necessarily 'on sale.' U.S. valuations are only slightly below their five-year average and at a modest premium to the broader market.”
Reservations About Staples
With higher beta, cyclical sectors leading U.S. equity markets higher this year, some defensive sectors are lagging. That is the case with consumer staples. Amid fears of rising interest rates and concerns that the sector is overvalued even relative to its lofty historical norms, the consumer staples sector has recently encountered some headwinds.
Food, beverage and tobacco stocks account for 46.56% of IYK's weight. Tobacco stocks slumped earlier this year, but have recently rallied amid news the Food & Drug Administration (FDA) is looking to enact stricter regulations against makers of competing e-cigarettes. The ETF also devotes about 35% of its combined weight household products makers and consumer durables manufacturers.
Still, investors should be wary of being too reliant on staples as core defensive holdings.
“Staples broadly are no longer bastions of steady growth, strong cash flow and high dividends. This tells us the category cannot be relied upon as a sweeping defensive play–rather, investors should be choosy within staples. We believe a good defense today is in quality companies demonstrating high profitability, sound balance sheets and strong brands,” according to BlackRock.
For more information on the consumer sector, visit our consumer staples category.
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