With the stock market surging as of late, many investors are finally convinced that the economy has turned a corner and the recovery is a sustainable one. Quality data and earnings reports have boosted this theory recently, as a better-than-expected housing report saw new home sales rise to a level unseen since the early 70′s. Meanwhile, corporate earnings have improved across a wide range of industries; everyone from Apple to JP Morgan is beating estimates, and market sentiment has continued to improve.
But the recent rally has also made some investors uncomfortable, as major fundamental issues remain. Unsustainable levels of debt and a high unemployment rate persist as threats to long-term economic growth, and some believe these risks aren’t properly reflected in asset prices. As such, some investors are looking to inch down the risk continuum, not sliding all the way to safe havens like gold and Treasuries, but bulking up on low-volatility, defensive plays to soften the blow in the event of a downward correction (see Five Defensive ETFs To Own When The Market Corrects). One interesting choice for investors looking to get defensive while also maintaining significant upside potential is the PowerShares Dynamic Food & Beverage Portfolio (PBJ). Below we highlight three reasons why PBJ could make a smart investment in the current environment and take a closer look at some of the fund’s holdings.
From 1998-2008, EPS growth in the consumer staples sector has outpaced EPS growth for the broad S&P 500 at a rate of 8.5% to 1% (page 2 PDF). This trend seems likely to continue as emerging markets continue to industrialize and obtain more money to spend on consumer products–increasing the market for global companies such as Coca-Cola and Kellogg’s. According to Dreyfus, consumer staples firms are better able than most to benefit from global operations. “Because the products sold in the emerging markets are largely the same products consumed in developed markets, the Consumer Staples companies enjoy tremendous economies of scale. If revenues can grow 4%-6%, but SG&A growth is limited to 2%-4%, the companies can deliver steady margin expansion” (PDF). For other long-term picks, see Five ETFs For Your IRA.
In addition to long-term growth potential, the holdings of PBJ have a definite tilt towards stability; the fund’s beta is just 0.7, suggesting that it will be much less volatile than the overall market (see more PBJ Fundamentals). Furthermore, many companies in PBJ have stable products that are have shown a consistent level of demand no matter what the state of the economy. Unlike the technology sector, which is forced to consistently reinvent itself in order to maintain an edge, many products produced by companies in PBJ have not changed in decades (such as Heinz’s Ketchup or Hershey’s chocolate bars). This allows these firms to avoid costly R&D operations and gives them a more stable base of end users.
Brand Name Power
One selling point of the vast majority of the stocks in this fund is the superior power of their brand names. Currently, all of PBJ’s top five holdings could find at least some of their divisions on the 2009 Interbrand 100 Best Global Brands List, including two (Coca-Cola and McDonald’s) in the top ten. In fact, according to Interbrand, Coke’s brand is worth a whopping $68 billion, the most in the world. The power of brands cannot be underestimated; they are able to inspire loyalty among consumers and drive sales for new products that are made by the same firm. Brands also provide companies with a tough-to-attack position that makes it hard for new competitors to break in. Speaking on the power of Coke’s brand, Warren Buffet once said: “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”
Food And Beverage ETF
PBJ tracks the Dynamic Food & Beverage Intellidex Index, which is comprised of stocks of U.S. food and beverage companies. The index is designed to provide capital appreciation by evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors (read more about “intelligent indexing” here). Currently, PBJ holds 30 securities, with about 97% of assets allocated to the consumer staples and consumer discretionary sectors.
PBJ is well-diversified across market capitalization levels, with the average market cap coming in at $17.7 billion. Its top five holdings consist of household names such as Yum! Brands (5.8%), Starbucks (5.3%), McDonald’s (5%), Kellogg’s (4.7%), and Coca-Cola (4.6%). The fund charges an expense ratio of 0.60% and it is up close to 30% over the past 52 weeks (see technical analysis of PBJ here).
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Disclosure: No positions at time of writing.