Not Much To See With Staples ETFs

With investors preferring higher beta, cyclical sectors this year, it is not surprising that some defensive groups are falling behind. For example, the Consumer Staples Select Sector SPDR (NYSE:XLP) is up just 6.8 percent year to date while the S&P 500 is higher by 10.7 percent.

Add to that, 14 of the 30 members of the Dow Jones Industrial Average are up at least 10 percent year to date. XLP and rival cap-weighted consumer staples ETFs are home to several Dow stocks, but Wal-Mart Stores Inc. (NYSE:WMT) is the only staples stock in the Dow sporting year-to-date returns of 10 percent or more.

Those are just a few of the data points that could be encouraging less-than-enthusiastic views of the consumer staples sector. In a note out Wednesday, AltaVista Research tagged XLP, the largest consumer staples ETF by assets, with an Underweight rating.

Not A Rosy Forecast

Typically, funds in this category consist of stocks trading at relatively expensive valuations and/or having below-average fundamentals, said AltaVista of its Underweight rating on XLP.

Serving as a further indictment of the consumer staples sector's 2017 lethargy is that the dollar is weak and ETFs such as XLP are chock full of companies that are inversely correlated to a strong U.S. currency. While XLP's marquee components are not declining, the ETF's year-to-date performance can be seen as disappointing with the U.S. Dollar Index down about 9 percent.

XLP components such as Procter & Gamble (NYSE:PG) and Coca-Cola Co. (NYSE:KO) generate significant portions of their sales overseas, meaning they should benefit from a weaker dollar.

More On The Lag

The specter of higher interest rates and high valuations, traits that have a tendency of weighing on the staples sector, are once again issues for investors to consider.

Consumer Staples have lagged the S&P 500 so far this year as investors reevaluate the sector in light of the possible threat of higher interest rates and better earnings growth in other sectors, said AltaVista. Consensus forecasts for accelerating top-line growth and margin expansion in 2017-18E seem optimistic to us, while valuations remain rich although within range of the last few years.

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