Market Overview

Think Staples Stink? Think Again

Think Staples Stink? Think Again

The consumer staples sector, the sixth-largest sector weight in the S&P 500, has been rightfully derided as one of this year's worst-performing groups.

The Consumer Staples Select Sector SPDR (NYSE: XLP), the largest exchange traded fund tracking the sector, and other traditional cap-weighted staples ETFs are sporting year-to-date losses of close to or more than 8 percent.

What Happened

While large-cap consumer staples stocks are struggling, the opposite is true of small-cap equivalents. The Invesco S&P SmallCap Consumer Staples ETF (NASDAQ: PSCC), the small-cap answer to XLP, was one of just five ETFs to hit all-time highs on Thursday, elevating its year-to-date gain to 10.25 percent.

PSCC follows the S&P SmallCap 600 Capped Consumer Staples Index, which features companies that are “are principally engaged in the business of providing consumer goods and services that have non-cyclical characteristics, including tobacco, textiles, food and beverage, and non-discretionary retail,” according to Invesco.

Why It's Important

PSCC's leadership over large-cap equivalents is not altogether surprising when considering small-cap ETFs are dominating large-cap rivals by historically wide margins this year. Like other small-cap funds, PSCC is benefiting from a tilt toward domestic revenue streams. Staples names in the S&P SmallCap 600 Index generate a slightly higher percentage of their revenue in the U.S. than do consumer staples members of the S&P 500.

The average market capitalization of PSCC's 20 holdings is $1.65 billion, putting the fund firmly in mid-cap territory. Additionally, PSCC has been relatively immune to the weakness in tobacco stocks this year because the fund devotes just 4.48 percent of its weight to the tobacco sub-industry.

What's Next

“Consumer staples have shown a strong small cap premium despite similar portions of revenue generated domestically despite size,” said S&P Dow Jones Indices. “This seems to be driven mainly by fear of uncertainty in the market, making it the second best performing small cap sector in June. It outperformed the more economically sensitive consumer discretionary sector in two consecutive months for the first time since July and Aug 2017, and the small cap consumer staples have been outperforming the small cap consumer discretionary by 11.2 percent more than the large cap consumer staples have been outperforming the large cap consumer discretionary.”

Making PSCC all the more appealing is that its annualized volatility to this point in the year is about 250 basis points below that of the large-cap XLP.

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