Traders Turn Against This Conservative Sector

The Consumer Staples Select Sect. SPDR (ETF) XLP, the largest consumer staples exchange-traded fund by assets, is up 6.4 percent year-to-date. That sounds pretty good until put into the context that XLP resides about 5.2 percent below its all-time high set in July and recently has shown little sign of rallying back to that high.

Earlier this year, low beta sectors were leading broader benchmarks higher. And part of the reason that defensive groups, such as consumer staples and utilities are were is that these sectors are interest rate-sensitive, meaning the Federal Reserve's refusal to raise interest rates this year was giving investors good reason to embrace higher-yielding, lower beta sectors.

The Allure And Threat Of Rising Interest Rates

As has been the case with the once beloved utilities sector, much of the allure surrounding consumer staples stocks, XLP and rival staples is evaporating as markets price in increasing chances of the Fed raising interest rates in December.

Data suggest some traders are betting on declines for XLP.

“Last week, we saw significant put buying in XLP, consisting of January 52 strike activity. This is notable given the fact that the options are only about 1.4 percent out-of-the-money at present levels in the fund, so traders seem to be betting on a price decline over the next few months,” said Street One Financial Vice President Paul Weisbruch in a recent note.

Add to that, XLP, like its utilities counterpart, has recently been shedding assets. XLP lost nearly $798 million in assets in third quarter after losing more than $693 million in the second quarter. The fourth quarter, just a month old, has been similarly unkind to XLP as the staples ETF has bled $618.1 million I in assets.

The Fed's monetary policy presents other risks to staples ETFs such as XLP. Notably, a stronger U.S. dollar often accompanies rising Treasury yields, which is problematic for multi-national companies that derive substantial portions of their sales overseas. That description fits many of XLP's 39 holdings.

Holdings And Strategy

XLP's top 10 holdings, a group that combines for over 60 percent of the ETF's weight, includes Dow components Procter & Gamble Co PG, The Coca-Cola Co KO and Wal-Mart Stores, Inc. WMT. None of those three are among the seven Dow stocks down on a year-to-date basis.

XLP currently labors below its 50-day moving average and is just 0.65 percent above its 200-day line.