Consumer Staples ETFs: Thinking Outside of the Big Box

The thesis for investing in staples becomes clearer in an uncertain market. But there are even more opportunities beyond the current market environment. This sector is traditionally more “old economy” than the consumer discretionary sector. So there is more room to modernize operations with new technology. One of these technology trends — e-commerce — has been mentioned throughout several recent earnings calls within the staples sector. It could potentially provide a boost to staples even after consumer spending normalizes.

After a weak 2023, the Consumer Staples Select SPDR Fund (XLP A) has so far outperformed the Consumer Discretionary Select SPDR Fund (XLY A) YTD. XLP is up 7.3% compared to XLY’s being down 1.6%. Market-cap weighted staples ETFs like XLP have been benefiting from outperformance of big box stores, discount retailers, and other large players. Those include Walmart (WMT), Costco (COST), and Kroger (KR).

Those companies have been prioritizing lower prices and higher customer retention instead of exhibiting pricing power and passing on higher costs to consumers. Equal-weighted staples ETFs like the Invesco S&P 500 Equal Weight Consumer Staples ETF (RSPS A-) have been weighed down by some weak performers like Walgreens Boots Alliance (WBA). They are only a small percentage of weight in market-cap-weighted ETFs.

E-commerce sales tend to be higher-margin than traditional retail sales due to factors like a lower investment in store display and a shorter delivery chain. In the short term, initial investment in e-commerce systems could show an initial lag in margins. But those margins are expected to expand as productivity is realized in later quarters.

Costco, for example, has been gaining attention as a discount retailer that has been able to grow profits and increase membership in an environment where consumers are becoming more selective with spending. In its F3Q24 quarter, Costco’s e-commerce comparable sales were up 20.7%. That was due to sales in gold and silver bullion, gift cards, and appliances. In another effort to modernize its supply chain, Costco has expanded its partnership with Uber Eats. That allows its customers to take advantage of fast, local online delivery.

Walmart has also been a pioneer in the e-commerce and omnichannel space — holding its spot as the largest brick-and-mortar retailer in addition to expanding its online presence. In its F1Q25 quarter, Walmart’s e-commerce sales were 21% higher year over year globally (and up 22% in the U.S.). Notably, U.S. net delivery cost per order improved by 40% as more efficiencies were realized.

Costco and Walmart sell a mix of staples and discretionary items. But traditional grocers like Kroger have been taking advantage of expanding cold chain e-commerce operations. This is mostly in the form of last-mile grocery deliveries direct to the consumer’s home in addition to online orders for curbside pickup. Both of these require a strong digital marketplace. Overall U.S. e-commerce sales in food and grocery has been relatively low. But that could have potential for greater share. Kroger last reported its 4Q23 earnings in March. It reported an 18% increase in digitally engaged households (customers who shopped both in-store and online spending three to four times more than just in-store).

E-commerce trends support consumer staples ETFs, but e-commerce ETFs still mostly consumer discretionary

Consumer staples sector ETFs can benefit from e-commerce trends. But investors shouldn’t necessarily look at e-commerce ETFs for exposure to consumer staples. E-commerce is a multisector trend. Yet it is focused on consumer discretionary retailers. It can be used as a higher-reward/higher-risk alternative for the discretionary sector.

For example, the largest e-commerce ETF — the Amplify Online Retail ETF (IBUY C+) — is about 51.2% consumer discretionary stocks. The next largest sector is the communication services sector. That sector includes internet and app-based retailers like Booking Holdings (BKNG), Lyft Inc (LYFT), Uber Technologies (UBER), and Airbnb (ABNB).

Consumer staples make up only 7.1% of its holdings including notable retailers like Walmart, Target Corp, and Kroger Co. Other e-commerce ETFs like the Franklin Disruptive Commerce ETF (BUYZ C) and the First Trust S-Network E-commerce ETF (ISHP C+) also include an allocation to industrial stocks (mainly transportation companies) that play a role in transporting goods. The allocation toward consumer staples could grow as more staples companies grow their e-commerce operations. But the easiest way to gain exposure to consumer staples is through broader sector ETFs.

E-commerce is one of the largest growth opportunities in the broader retail space. And consumer staples companies can also use e-commerce in their operations. Consumer staples ETFs may benefit from e-commerce trends. But e-commerce ETFs are primarily focused on consumer discretionary stocks.

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