As Staples Rise, Consider Alternatives to XLP
Some might say it is a sign that the rally is losing steam and stocks are set to pullback in the near-term. Whatever the motivation may be, buyers have stepped into consumer staples in recent weeks, sending the likes of Procter & Gamble (NYSE: PG), Kimberly-Clark (NYSE: KMB) and Clorox (NYSE: CLX) to fresh highs.
That trend has been excellent news for the Consumer Staples Select SPDR (NYSE: XLP). XLP had $5.75 billion in assets under management as of February 5, making it the largest staples ETF by that metric. With an expense ratio of 0.18 percent, XLP is by no means expensive.
XLP, which is home to familiar names such as P&G, Coca-Cola (NYSE: KO) and Wal-Mart (NYS: WMT), among others, has a history of being a solid performer. Over the past year, two years and five years, the fund has delivered returns that investors are not apt to quibble about and XLP has kept up that tradition this year, gaining 4.2 percent on a year-to-date basis.
However, with signs emerging that staples stocks are in vogue, investors may want to consider alternatives to XLP. Interestingly, recent returns indicate that could be a wise move as 2013 goes along.
Vanguard Consumer Staples ETF (NYSE: VDC) The Vanguard Consumer Staples ETF is the staples fund that is most comparable to XLP in terms of size and holdings. Both are littered with the sector's most familiar names such as P&G, Coca-Cola PepsiCo (NYSE: PEP) and Costco (NASDAQ: COST).
On the surface, it would appear the differences between these two staples ETFs are almost non-existent. However, there is one key element to the equation that long-term investors should not overlook. Just before the end of 2012, Vanguard announced an array of fee reductions for some of its ETFs. That announcement included a fee cut for VDC, which now has annual expenses of 0.14 percent compared to 0.18 percent for XLP. Four basis points does not sound like much, but over time periods of multiple years, it can make a difference. As it is, VDC is already slightly outpacing XLP on a year-to-date basis.
First Trust Consumer Staples AlphaDEX Fund (NYSE: FXG) The First Trust Consumer Staples AlphaDEX Fund keeps with the tradition of the compelling AlphaDEX methodology. That includes weighting components based growth and value factors such as price appreciation and cash flow to price.
That leads to a lineup that is starkly different than what is found with XLP or VDC. For example, FXG's second-largest holding accounting for over five percent of the ETF's weight is the controversial and volatile Green Mountain Coffee Roasters (NASDAQ: GMCR). Yes, FXG does feature allocations to more standard staples fare such as P&G and Kellogg (NYSE: K), but those names reside further down the fund's lineup with allocations well below two percent apiece.
Not to mention, FXG is pricey with a 0.7 percent annual expense ratio. However, investors have been rewarded by FXG. The ETF is up over fiver percent year-to-date, indicating it offers a valid way of playing the staples sector with a near- to medium-term outlook.
Global X Brazil Consumer ETF (NYSE: BRAQ) Investing in Brazil via ETFs has become a tricky gambit due to the plunge in the country's state run oil giant Petrobras (NYSE: PBR). In other words, investors looking to profit with a Brazil-specific ETF would do well to ensure that fund has minimal to no exposure to Petrobras.
The Global X Brazil Consumer ETF fits the bill. BRAQ is home to over 30 stocks and not one of them is Petrobras. It must be noted that BRAQ is not a pure staples play as discretionary-related names equal about 35 percent of the fund's weight, but the remainder of the ETF is allocated to food and beverage and household goods names.
A bull thesis for BRAQ would include low unemployment in Brazil, delinquencies, rising salaries and record-low interest rates, according to Reuters. Dangers for BRAQ include four consecutive months of declining consumer confidence and a consumer loan default rate that rose to 7.9 percent in December from 7.8 percent in November. That data has been reported this year and has not yet deterred BRAQ from gaining almost five percent.
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