A Rare Bearish Call On A High-Flying Staples ETF

Among the nine original sector SPDR exchange-traded funds, only two can top the Consumer Staples Select Sect. SPDR (ETF) XLP on a year-to-date basis. XLP, the largest consumer staples ETF by assets, is up more than 10 percent year-to-date.

That is just one data point, but it underscores just how difficult it has been to bet against the staples sector in a year in which investors are heavily defensive, lower beta sectors. Several of XLP's 38 holdings hit 52-week highs on Wednesday, perhaps indicating now is not the time to be bearish on staples stocks.

The Scope On Staples

However, some analysts are not enthusiastic about XLP at the moment. In a recent note, AltaVista Research dinged XLP with an underweight rating, implying below average appreciation potential for the staples ETF.

“Typically, funds in this category consist of stocks trading at relatively expensive valuations and/or having below-average fundamentals,” said AltaVista.

Related Link: Mark Sebastian's Options Insight: How To Play The Consumer Staples ETF

With staples fundamentals, broadly speaking, still sturdy, valuation is the concern here. AltaVista's 2016 estimated price-to-earnings ratio for the S&P 500 is 17.9. For XLP, the research firm estimates the staples ETF's P/E to be 22.3, meaning only two of the other 10 sector SPDR ETFs trader at higher multiples than XLP based on AltaVista estimates.

Whether it is as a hedge against long positions in XLP components or outright bearish bets on the ETF itself, XLP is home to elevated short interest. As a percentage of shares outstanding, XLP's short interest is 30 percent, according to AltaVista data. Among the sector SPDR ETFs, only the Materials Select Sector SPDR XLB has a higher percentage of its shares outstanding sold short.

“Estimates for next year look aggressive to us, especially with commodity prices now reflating somewhat, which in turn would likely put these firms' margins under pressure. In any case Consumer Staples stocks have seen their valuation multiples expand considerably over the last five years and as a result these stocks appear rather expensive, leading to an UNDERWEIGHT recommendation,” added AltaVista.