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We’ve all been there — you’re at the grocery store, working your way through the aisles and you come across the dairy section. While staring blankly at the refrigerated shelves, you ask yourself the question Americans have been asking themselves for decades: “Do we need milk?”
The decision to buy milk has little to do with your current income or the global economic situation — you buy it if you need it. Food, beverages and household products like toilet paper and soap are made by companies in the consumer staples sector. This sector is filled with companies who make the everyday products we can’t live without.
If you’re a human being, you need to eat, drink, clean and care for yourself and it doesn’t much matter how the broader economy is doing. When the stock market tanks and jobs are lost, people still need to eat and wash their faces. That’s what consumer staples ETFs seek to track — companies making the products we need no matter what our paychecks look like.
Best Performing Consumer Staples ETFs:
Overview: What are Consumer Staples ETFs?
With a nickname like consumer defensive, you can get an idea about the investments in this sector. When the economy is booming and the market rises, consumer staples stocks may trail the broader indexes because consumers aren’t buying more toilet paper or milk with their extra cash. You use food, beverages and household products at a constant rate. During bull runs, you aren’t doubling your Clorox purchases, are you?
But during recessions, consumers have less discretionary income to play with. This means less money spent on gadgets, clothing and dining — all highlights of the aptly-named consumer discretionary sector. When the consumer’s purchasing power decreases, consumer discretionary stocks take a hit. But since these staples are purchased regardless, this sector tends to thrive in recessions, making it an excellent hedge during booms and a shrewd play during busts.
What Makes a Great ETF
ETFs are terrific investment vehicles because they give access to dozens and sometimes hundreds of different stocks for one low price. Since the companies in the sector tend to be established firms with predictable profits, consumer staples ETFs often hold only a handful of stocks. This creates a lack of diversity among ETFs in the sector — they all buy similar companies. Without much variation in the holdings, it’s more important than ever to look for these three features:
- Cost: If you pull up an ETF in your brokerage app and your first glance isn’t at the expense ratio, we haven’t been doing our jobs here at Benzinga. That goes double for sectors like consumer staples. If you’re paying more than 50 basis points for a sector ETF, you better have a bulletproof reason.
- Yield: Companies here tend to have high dividend stocks, so an investor looking at consumer staples ETFs should consider how much the fund yields. You won’t get much growth from companies like Proctor & Gamble and Costco.
- Volume: ETFs come and go like the wind. Newer, more trend-focused funds might sound sexy, but they have no assets and the shares are hard to sell. This isn’t the sector for trendy funds anyway. A solid asset base and lots of trading volume are key aspects to look for.
The Best Consumer Staples ETFs to Watch For
Using the features listed above, Benzinga has ranked the best consumer staples ETFs for investors to consider for their portfolios. Most of these funds have similar holdings, so consider factors like expense ratio, spread, volume and yield.
ETF 1: Consumer Staples Select Sector SPDR Fund (XLP)
The SPDRs are like the New England Patriots of ETFs — experienced, efficient and ready to fend off any challenge from heralded newcomers. XLP came into existence in 1998, back when Bill Belichick was just an anonymous coach for the Cleveland Browns. In the last 2 decades, XLP has amassed over $13 billion in assets, making it the strongest and most liquid fund in the sector.
With a 0.13% expensive ratio and 0.02% average spread, XLP is cheap to own and trade. The fund contains only 33 holdings, dominated by American stalwarts Procter & Gamble, Coca-Cola and PepsiCo. Household products, food and tobacco, and beverage companies make up about 80% of the fund’s holdings. XLP tracks a market-weight index of S&P 500 consumer staples companies, which explains the low number of stocks in the portfolio. Nearly 13 million shares are traded daily on average and the dividend yield is currently 2.60%. If you want cheap exposure to large cap consumer staples stocks, XLP is still the top choice for investors.
ETF 2: Fidelity MSCI Consumer Staples Index ETF (FSTA)
Fidelity, Vanguard and Charles Schwab are currently in a race to the bottom with their fund expense ratios and investors are reaping the rewards. Fidelity’s offering in the consumer staples space has a 0.08% expense ratio, cheapest in the sector (but offset somewhat by the 0.05% average spread). The fund tracks a market-weight index of consumer staples stocks, but isn’t limited to the S&P 500 like XLP.
Since it tracks a wider index of stocks, the fund currently has 89 different holdings. The top names are similar to XLP though: Procter & Gamble, Coca-Cola, PepsiCo, Walmart and Costco are the 5 largest holdings. FSTA has nearly $618 million in assets and over 120,000 shares are traded daily on average. The dividend yield comes in at 2.48%. Since its debut 5 years ago, FSTA has been one of the cheapest and most effective ways to get exposure to the consumer staples sector.
ETF 3: Vanguard Consumer Staples ETF (VDC)
Vanguard makes an appearance on almost every best ETFs list and its entry in the consumer staples sector is, as expected, top-notch. Since its 2004 inception, VDC has amassed $5.4 billion in assets while charging a tiny 0.10% expense ratio. With an average spread of 0.03%, VDC is one of the cheapest funds to own and trade in the consumer staples space.
VDC is another cap-weighted index tracking fund with 92 total holdings. The top names should be familiar at this point: Procter & Gamble, Coca-Cola, PepsiCo, Walmart and Phillip Morris. Despite having a larger basket of stocks, the top 10 shares comprise over 66% of the fund’s total holdings.
Food and tobacco companies are a little more heavily weighted here than in comparable funds, but most of the holdings remain the same. The fund trades over 126,000 shares daily on average and yields 2.33%. It’s no longer the cheapest fund and doesn’t have the highest yield, but VDC is a solid investment and trades commission-free in Vanguard brokerage accounts.
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ETF 4: iShares Global Consumer Staples ETF (KXI)
If you want to include some international stocks in your consumer staples portfolio, KXI is the fund to choose, but it’s much more expensive than its U.S.-only brethren. Still, international exposure in this sector is tough to come by and KXI is worth the price.
KXI just celebrated its 13th birthday by topping $857 million in assets, which is more than Fidelity’s dirt cheap fund FSTA. As with most international funds, expenses and transactions costs play a role. KXI has a 0.46% expense ratio and an average spread of 0.16%. The fund holds more than 50% U.S. stocks, but its top holdings feature names like Nestle, Diageo and Unilever.
Overall, it holds 92 total stocks and the UK, Switzerland, Japan, France and the Netherlands are the most represented countries behind the U.S. The fund yields 2.38%, but only 57K shares are traded daily on average. It’s expensive and not very liquid, but companies like Nestle and Diageo aren’t held by other funds.
ETF 5: Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS)
RHS is expensive for a U.S.-only consumer staples fund, but it’s one of the few equal-weighted funds in the sector and has provided surprisingly good returns compared to the S&P 500 since its inception.
RHS is an equal-weight fund, meaning all 34 holdings have pretty much the same number of shares in the portfolio. The highest concentrated holding is Estee Lauder at 3.34% and the lowest is Coty Inc at 2.24%. Equal-weighting the sector does diversify the fund from its competitors, but it comes with a 0.40% expense ratio.
The fund has nearly $450 million in assets and yields only 2.24%, which is low for the space. Food and tobacco companies are heavily featured, which may steer away some socially conscious investors. Only 31,000 shares are traded daily on average, so liquidity can be an issue as well.
ETF 6: iShares U.S. Consumer Goods ETF (IYK)
IYK is from Blackrock’s iShares Fund family and it’s an aggressive play on a sector more known for shelter-seeking investors. An aggressive consumer staples fund might not make sense to every investor, but if you’re looking for a different take, it does have a solid history of outperformance.
IYK is nearly 2 decades old and has just over $472 million in assets. The expense ratio is a little too high at 0.42%, but the average spread is low (0.03%) and it’s very easy to trade. Overall, the fund holds 112 stocks and navigates outside traditional waters to sectors like automobiles, textiles, and software.
All stocks are U.S.-based and the top 5 holdings are Procter & Gamble, Coca-Cola, PepsiCo, Phillip Morris and Nike. The 2.33% dividend yield is low compared to other ETFs we’ve explored in consumer staples and only 14,000 shares are traded daily on average. If you’re the type of investor who thinks the best defense is a good offense, IYK might have a spot in your portfolio.
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Using Consumer Staples ETFs in Your Portfolio
Consumer staples companies aren’t flashy and certainly won’t be the leaders during big stock market booms. But during recessions or times of heavy volatility, consumer staples ETFs can be a safe port. Companies in these funds produce the items we need to use everyday — food and water, soap and toothpaste, and yes, even milk.
If you want to add a little stability to your portfolio, consumer staples ETFs will give steady but unspectacular returns along with a nice dividend. ETFs like these are great investments for retirement savers looking to ease up on risk. Or maybe you’re tired of watching the market bounce from tweets and announcements and want a place for steadiness and a little income.