The economic backdrop for the consumer staples sector remained more or less weak in 2013, due to a difficult consumer spending environment. Middle-class consumers struggled to cope with rising gas prices, delayed income tax refunds and higher payroll taxes. In addition, difficult operating conditions in Europe and a slowdown in some major emerging countries threatened growth.
Consumer staple companies have been witnessing sluggish growth in the developed markets, due to market saturation, which along with lower disposable incomes and increased competitive activities have added to their woes. As a result, many of them have been looking at faster growing emerging markets.
Relative to the mature North American and European markets, emerging markets such as Brazil, India, China, Mexico, Russia and Southeast Asia are still untapped. That’s a good strategy in the long run, but the near-term outlook for many of these markets remains uncertain. The ongoing currency turmoil is particularly problematic, as a stronger dollar reduces the value of outside-U.S. sales and in turn limits growth.
This uncertain macro environment in U.S. as well as in the international markets is a big reason why many companies in the sector have lowered their guidance for 2014. With top-line growth hard to come by, many companies have been focusing on cost controls, acquisitions and share buybacks to boost the bottom-line.
In a crowded and competitive space, consumer product companies need to regularly innovate and upgrade their brands to create differentiated value propositions for their customers and to remain successful.
In order to boost profits and top-line growth, most consumer staples companies are divesting low-margin brands, improving the supply chain and implementing cost-reduction initiatives. These help to reduce the effects of inflating commodity costs and other input costs, which have remained a drag on margins of most companies in this sector.
Many consumer staple companies are also carrying out acquisitions, both domestically and internationally, to expand their existing customer base and product lines into new markets. Some of them are also forming partnerships to take a lead in this challenging environment.
Playing the Sector through ETFs
Given the defensive nature of this sector, it will outperform when equity markets are more bearish and underperform when bullish. The ups and downs of the sector due to the U.S. and global exposure can be played with a wide array of ETFs.
Consumer Staples Select Sector SPDR ETF (XLP):
Launched on Dec 16, 1998, XLP is an ETF that seeks investment results corresponding to the S&P Consumer Staples Select Sector Index. This fund consists of 42 stocks of companies that manufacture and sell a range of branded consumer packaged goods, with the top holdings being Procter & Gamble Co. (PG), The Coca-Cola Co. (KO) and Philip Morris International Inc (PM).
The fund’s expense ratio is 0.16% and it pays out a dividend yield of 2.47%. XLP has about $5.5 billion in assets under management as of Feb 26, 2014.
Vanguard Consumer Staples ETF (VDC):
Initiated on Jan 26, 2004, VDC tracks the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. It measures the investment return of large-, mid-, and small-cap U.S. stocks in the consumer staples sector. The fund has a total of 110 stocks, with the top three holdings being Procter & Gamble, Coca-Cola and Wal-Mart Stores Inc. (WMT).
It charges 0.14% in expense ratio, while the yield is 2.28%. VDC has managed to attract $1.8 billion in assets under management till Jan 31, 2014.
First Trust Consumer Staples AlphaDEX (FXG):
FXG, launched on May 8, 2007, follows the equity index called StrataQuant Consumer Staples Index. FXG is made up of 38 consumer staples securities, with top holdings being WhiteWave Foods Company (WWAV), Tyson Foods Inc. (TSN) and Constellation Brands, Inc. (STZ). The fund’s expense ratio is 0.70% and the dividend yield is 0.94%.Iit has $769.4 million in assets under management as of Feb 26, 2014.
Guggenheim S&P 500 Equal Weight Consumer Staples (RHS):
Launched on Nov 1, 2006, RHS is an ETF that seeks investment results corresponding to the S&P 500 Equal Weight Index Consumer Staples. This is an equal-weighted fund and constitutes 40 stocks, with the top holdings being Beam Inc. (BEAM), Walgreen Co. (WAG) and Tyson Foods Inc.
The fund’s expense ratio is 0.50% and pays out a dividend yield of 1.54%. RHS has about $108.9 million in assets under management as of Jan 31, 2014.
PowerShares Dynamic Consumer Staples (PSL):
PSL, launched on Oct 12, 2006, follows the Dynamic Consumer Staples Sector Intellidex Index. It comprises 42 stocks that are principally engaged in providing consumer goods and services that have non-cyclical characteristics, including tobacco, textiles, food and beverage, and non-discretionary retail. Top holdings include United Rentals Inc. (URI), Church & Dwight Co Inc. (CHD) and Whole Foods Market Inc. (WFM).