Heading into 2018, Consumer Staples stocks and ETFs are caught in a tug of war between extremely upbeat consumer confidence and rising rate prospects. With tax reform (or cuts) knocking on the door and the labor market in great shape, consumer confidence is hovering around a 17-year high.

According to the second estimate, U.S. GDP expanded at 3.3% in the third quarter of 2017, marking the fastest pace of growth since the third quarter of 2014. Since consumer spending accounts for about 70% of U.S. GDP, the data once again confirms the super-positive consumer sentiment. But the ongoing Fed policy tightening can pose threats to the appeal of the sector (read: ">8 ETF Picks for December).

Let’s delve a little deeper and highlight the pros and cons of the sector.

Positives

The Conference Board's measure of consumer confidence increased to 129.5, marking the highest level since the index hit 132.6 in November 2000. Analysts expected a reading of 124, following October’s 126.2.

During the fifth straight month of gains, the present situations index advanced from 152 to 153.9 while the expectations index increased from 109 to 113.3. The unemployment rate dropped to 4.1% in October, the lowest level in nearly 17 years. So, one can expect solid activity on consumers’ part in the coming days. This is especially true given the spree of holiday season shopping.

Also, the sector is non-cyclical in nature and thus offers great support in a volatile trading environment. Given the sour relation between North Korea and the United States and uncertainty in Brexit deals, Consumer Staples may shine any time on geopolitical tensions.

Lastly, many consumer staples ETFs are heavy on blue-chip stocks like Wal-Mart Stores Inc WMT. These funds are iShares Edge MSCI Multifactor Consumer Staples ETF CNSF, Fidelity MSCI Consumer Staples Index ETF FSTA, Vanguard Consumer Staples ETF VDC, John Hancock Multifactor Consumer Staples ETF JHMS and Consumer Staples Select Sector SPDR Fund XLP.

Now, with Wal-Mart reporting blockbuster third-quarter fiscal 2018 results and gradually positioning itself as an e-commerce destination, these staples are likely to gain ahead (read: E-Commerce Face-Off: Wal-Mart Vs. Amazon ETFs).

Negatives

However, this upbeat economic growth is an important tool for the Federal Reserve in deciding on steady policy tightening. The Fed has already raised short-term interest rates twice this year, and may enact another one this month.

Many analysts expect about three hikes next year. Deutsche Bank went a little further in predicting that “the Federal Reserve could hike interest rates as many as five times by the end of 2018.” And if the tax reform experiences a seamless passage, U.S. inflation may tick up.
All these may result in a rising rate environment. And though consumer confidence is pretty upbeat right now, the sector can lose out in a rising rate environment. The appeal for the decent dividend offered by the Consumer Staples stocks will be diminished then (read: Rate Hike in the Cards? Discard These Sector ETFs).

Bottom Line

Thanks to the above-mentioned threat, almost all Consumer Staples ETFs a have a Zacks Rank #4 (Sell) or a Zacks Rank #5 (Strong Sell). Investors thus should keep a tab on economic developments before taking an investing decision on staples ETFs.

The funds in the sector returned in the range of 4% to 9.4% in the last one month (as of Dec 5, 2017). Some of the top-performers are First Trust Consumer Staples AlphaDEX Fund FXG, Guggenheim S&P 500 Equal Weight Consumer Staples ETF RHS and JHMS (see all Consumer Staples ETFs here).

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