The consumer staples sector, the sixth largest sector weight in the S&P 500, is prized by investors for two primary reasons: its defensive posture and steady dividends. In other words, there is a lot to like in the staples sector for conservative investors looking for income. After all, many of the largest consumer staples stocks, including those that reside in the Consumer Staples Select Sector SPDR (XLP), have some of the longest dividend increase streaks in the U.S. However, investors can add some excitement, and maybe higher returns, with the consumer staples sector by trying alternative weighting methodologies.
Among exchange-traded funds (ETFs) tracking the staples sector, the biggest names employ market capitalization weighting, but the Guggenheim S&P 500 Equal Weight Consumer Staples ETF (RHS) merits consideration as well. Actually, the equal-weight RHS warrants a look in the near term because consumer staples stocks often prove sturdy in May. "For example, the consumer staples sector of the S&P 500 Equal Weight rose 4 percent on average, ahead of the S&P 500 Equal Weight Index's 0.8 percent, while outperforming 63 percent of the time since 1990," said CFRA Research Head of ETF and Mutual Fund Research Todd Rosenbluth in a note out earlier this week. (See also: A Guide to Investing in Consumer Staples.)
RHS tracks the S&P 500 Equal Weight Consumer Staples Index. A frequent criticism of the equal-weight methodology is that, when it outperforms cap-weighted indexes, it does so because the equal-weight methodology puts more emphasis on smaller stocks. To be sure, RHS is not heavily allocated to the most familiar staples stocks, such as Dow components The Procter & Gamble Company (PG) and The Coca-Cola Company (KO). (See also: S&P 500 ETFs: Market Weight vs. Equal Weight.)
Still, it is hard to argue with the way RHS does business. Over the past three years, RHS has topped XLP by 620 basis points. Here is where the critics might step in and claim that RHS has been significantly more volatile than a cap-weighted competitor due to increased small-cap exposure. However, RHS has been barely more volatile than its cap-weighted rivals over the past three years. "In addition to our favorable view on many of the RHS's holdings, CFRA is positive on the modest volatility of the ETF. Indeed, the three-year standard deviation for RHS of 10.1 is below the 10.2 of the SPDR S&P 500 ETF (SPY) despite having greater exposure to more moderately sized companies," said CFRA.
About 54 percent of the roster in RHS is allocated to food makers and food retailers, with another 19 percent dedicated to beverage companies. (See also: When Is the Right Time for Food and Beverage Stocks?)