Investors that are concerned about the U.S. stock market setting itself up for a new bear market, should begin reevaluating their portfolios. The first move would be a shift from the aggressive sectors, such as financials, into the more conservative sectors.
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Looking back at 2008 when the S&P 500 was down roughly 34%, the SPDR Consumer Staples ETF (ARCA:XLP) only lost around 16% of its value. Granted that is still a double-digit loss in 12 months, but when compared to the overall market, it is an impressive number.
There is no reason to believe another 2008 is around the corner. Even with that said, many investors I speak with are looking for lower-risk ETFs that will move higher if the market rallies, but will not take as big a hit on a pullback. Unfortunately, there is no perfect ETF for that scenario. One of the best sectors for maintaining exposure to the equity market with below average risk is the consumer staples.
A consumer staple can range from toilet paper to cleaning supplies to mustard. The supplies that we use every day and typically need to be bought, regardless of the GDP. The fact that these things are needed for normal everyday life makes them the closest thing to recession-resistant.
SEE: A Guide To Investing In Consumer Staples
Consumer Staple ETF
The largest consumer staple ETF is XLP, with over $5.6 billion in total assets. The ETF is composed of 43 stocks and charges an expense ratio of 0.18%. The top four holdings make up around 44% of the allocation, which makes the ETF top-heavy. They are Proctor & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Philip Morris International (NYSE:PM) and Wal-Mart (NYSE:WMT).
The major industries represented in XLP are beverages (21%), food and staples retailing (21%), household products (20%), tobacco (18%) and food products (18%). The ETF also pays a dividend yield near 2.7% and is up almost 4.5% for the year. Even though the return is lagging the S&P 500, it has been less volatile and the ETF is sitting on support at the 50-day moving average, making it attractive technically.
Of the top four holdings in XLP, the stock with the best chart in 2012 is KO, which is close to an all-time high. The global beverage maker trades with an expensive PEG ratio of 2.8 and has a forward P/E ratio of about 17. A dividend yield of 2.7% is attractive, but the valuation makes the stock too risky.
A non-U.S. stock with a more attractive PEG ratio is PM, which sells cigarettes and tobacco products outside of the U.S. A PEG ratio of around 1.5 and a dividend yield of 3.6% make the stock attractive. Technically the stock has been in a losing streak and is now down roughly 6% from an all-time high. The pullback could be exactly what investors need to begin accumulating the stock.
The largest holding of XLP, PG, has taken a hit recently, as the stock has fallen approximately 6% from its 2012 high. The positive is that the stock is holding support at $63 and the 3.5% dividend yield is well above average. The problem is valuation, with a PEG ratio of 2.23 and forward P/E ratio of 15.48.
SEE: Investment Valuation Ratios
The Bottom Line
If the risk-on trade that was working early in 2012 comes back, it will be good for the high-risk sectors that does not include the consumer staples. If the current movement back to less risky asset continues into the summer, then the consumer staples will be the place to be. Investing in the sector depends on your outlook for risk as well as diversification. I look at the consumer staples as a great way to diversify a portfolio that is heavily invested in equities.
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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.