Wednesday’s ETF To Watch: Consumer Staples Fund (XLP)

by on October 27, 2010 | ETFs Mentioned:

With midterm elections around the corner, the entire nation is sitting on the edge of their seats, awaiting what some believe will be a major shift in the political balance of power in the halls of Congress. Depending on how elections pan out, stocks could see a number of different reactions, making next Tuesday an important day for politics and markets alike. For now, the tail end of earnings season is still the current market mover, as companies release their most recent fiscal quarter performance, giving insights on how they have stood up in the face of stubbornly low growth this past quarter [see also Closer Look At S&P 500 ETF Options].

Today, before the market open, Procter & Gamble (PG) is set to release their 2011 first quarter earnings report. Founded in 1837, the consumer staples company was recently placed at number six on Fortune’s Most Admired Companies of 2010 and is one of the largest consumer staples product companies in the world. While Procter & Gamble is able to boast 23 brand names that rake in over $1 billion in annual net sales, the company has likely seen a significant reduction in profit margins for a variety of its products thanks to surging commodity prices, and increased advertising to defend market share across the board. With ties to various corners of the consumer market, P&G’s earnings will comment on how consumer spending has acted over the last three months in spite of both rising input prices and the sluggish economy and will likely be a big market mover for the day [see also ETFS Rolls Out Physical Precious Metals Basket ETF (GLTR)].

Analysts have estimated that the company will haul in an even EPS of $1.00 along with revenues of $20.3 billion; a 2.2% growth from this time last year. This compares relatively favorably with last quarter where earnings came in slightly lower than expected at just $0.73 a share in profits. Even more troubling is the weak performance out of fellow consumer giant Kimberly-Clark which reported weak earnings on Tuesday. KMB announced that its most recent quarter saw profits fall by 19% on revenues that increased by just 1% from a year earlier. Due to this negative sentiment already in the market, look for this report from PG to have a major impact on the consumer staples sector, as well as the DJIA, of which P&G is a member [see also Ten Commandments Of ETF Investing].

With this earnings announcement on tap, the Consumer Staples SPDR (XLP) should be active in Wednesday trading. This ETF’s top holdings include Procter & Gamble (15%), Wal-Mart (9.4%), and Coca-Cola Company (7%). The all U.S. fund holds roughly 75% of its assets in the consumer goods sector, while the rest are allocated to the consumer service corner of the market. So far in 2010, XLP has gained 8.5% while paying out a dividend of 2.5%. If P&G’s report comes in lower than expected, this fund will likely fall on the day, but if the earnings are positive, look for XLP to post a solid trading session [see more on XLP's fact sheet].

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Disclosure: Photo courtesy of Derek Jensen, no positions at time of writing.