Consider Consumer Staples

by on March 7, 2013 | Updated April 1, 2013 | ETFs Mentioned:

During the past few years, markets have suffered losses not seen since the Great Depression, with hardly any sectors left untouched by the tidal wave of economic uncertainty. Some of the only firms to survive the crisis with only a few bruises were consumer staples; companies that manufacture or sell recession-proof necessities, or goods that consumers rely on. ETFs that focus primarily on these funds are perfect for the investor looking to not only weather an economic downturn, but also flourish during the eventual turnaround [see Visual History Of The S&P 500].

There are currently 14 consumer staples equity ETFs, which offer investors exposure to domestic, international, large or small cap stocks and everything in between.

What’s In Your ETF?Consumers out in Beijing

These ETFs are highly attractive for any kind of investor, offering exposure to some of the largest and most stable companies in the world. These securities are also highly desirable for their ability to generate consistent current income even when the economy heads south. But buyers beware, consumer staple ETFs also have a tendency to be dominated by a number of mega firms, including Coca Cola (KO), Wal-Mart (WMT), and Proctor & Gamble (PG). While this is not inherently a bad thing, over exposure to a single firm could skew the fund’s returns, especially if one of these mega funds has a bad quarter [see 10 Questions About ETFs You've Been Too Afraid To Ask].

The chart below highlights domestic large cap, small cap and international funds that focus on consumer staples, revealing the differences between the number of holdings and the percentage of these holdings that are in the top 10 assets; also note that the size of each bubble is based on the portfolio’s level of concentration in the mega consumer staples highlighted above:

  • Dow Jones Emerging Markets Consumer Titans Index Fund (ECON, C+)
  • Consumer Staples AlphaDEX Fund (FXG, B)
  • S&P Global Consumer Staples Sector Index Fund (KXI, A-)
  • S&P SmallCap Consumer Staples Portfolio (PSCC, C+)
  • Consumer Staples ETF (VDC, A+)
  • Consumer Staples Select Sector SPDR (XLP, A)

This comparison is only based on the weighting methodology of consumer staples; it is also important for investors to take a close look under the hood of the historical returns of these ETFs, as past data can be an indicator of future outcomes in similar market conditions.

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Disclosure: No positions at time of writing.