Consumers Still Rule the Day

06/26/2013 6:30 am EST

Focus: MARKETS

Thomas Graves

Group Head, US Equity Research, S&P Capital IQ

The markets have zoomed ahead, but investors remain skeptical, plowing their money into necessities, says Tom Graves of S&P Capital IQ.

As of June 17, S&P Capital IQ's MarketScope Advisor product identified 16 equity exchange traded funds (ETFs) with a Consumer Staples emphasis.

Of these 16 ETFs, S&P Capital IQ Equity Research had an Overall Ranking of Overweight on three. These were Consumer Staples Select Sector SPDR Fund (XLP), iShares S&P Global Consumer Staples Sector Index Fund (KXI), and Vanguard Consumer Staples Index Fund ETF Shares (VDC).

They are all ranked Overweight in the Risk Considerations and Cost Factors categories, but are ranked Marketweight in Performance Analytics. Although yield is not part of the ranking methodology S&P Capital IQ Equity Research utilizes for equity ETFs, these ETFs recently had the top 12-month yields among the 16 sector Consumer Staples ETFs, led by XLP's 2.7%.

As of May 31, more than 99% of XLP's assets were US-based, and 20% of its holdings were in the Household Products sub-industry. In comparison, at April 30, KXI had only 50% of its assets in US holdings, and its largest sub-industry was Packaged Foods & Meats (24%). As of March 31, more than 99% of VDC's assets were US-based, and Household Products was its largest sub-industry (20%).

Each had Procter & Gamble (PG), Coca-Cola (KO), Philip Morris International (PM), and Walmart (WMT) among its five largest holdings. We advise looking under the hood to see what areas of ownership concentration a given ETF has.

Three of the 16 Consumer Staples ETFs recently had a market capitalization of more than $1 billion, led by XLP's $6.7 billion. At the other end of the spectrum, nine of the sector ETFs had a market cap of less than $100 million. Also, each of the 16 sector ETFs has existed since at least June 2011, with the oldest (XLP) dating back to December 1998.

Of the 11 Consumer Staples ETFs on which we had a three-year beta (a measure of price volatility) available, all of them had a beta of less than the S&P's 500 1.0, with the lowest being XLP's 0.50, and the highest being 0.98, from PowerShares Dynamic Retail Portfolio (PMR).

Year-to-date through June 14, on a price-only basis, Consumer Staples stocks in the S&P 500 were up 15.9%, outpacing a 14.1% rise for the broader index. When dividends are included in the calculation, the Consumer Staples sector had a total return of 17.3%, versus 15.2% from the S&P 500.

Through June 14, the best-performing (price-only basis) year-to-date Consumer Staples sub-industries (S&P 500 companies only) were Personal Products and Drug Retail, up 27.8% and 26.8%, respectively, while the weakest was Food Distributors, up 8.9%.

In the year ahead, we continue to see mixed fundamentals for the Consumer Staples sector. Overall, we expect relatively modest revenue growth from mature markets in the US and Western Europe, along with some faster-growth opportunities from developing markets (e.g., parts of Asia).

Read more from S&P Capital IQ here...

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