Old Reliable With This Staples ETF


Underscoring investors' affinity this year for lower risk sectors, the Utilities SPDR (ETF) (NYSE:XLU) is by far the best-performing sector SPDR exchange-traded fund with a gain of 11.3 percent. Further cementing the notion low beta is in style this year, the Consumer Staples Select Sect. SPDR (ETF) (NYSE:XLP) is in the second spot behind XLU with a gain of 3.9 percent.

But wait. There's more. Last Friday, 19 ETFs hit all-time highs. Including XLP, four were staples ETFs, while another seven were broad market or dividend ETFs with large allocations to the consumer staples sector.

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Related Link: Paying Up To Play Defense With Staples ETFs

It Costs A Pretty Penny

Embracing XLP and rival staples ETFs is not inexpensive. In fact, XLP is expensive. At least according to AltaVista Research, which estimates the ETF will trade at 20.8 times earnings this year, well above the research firm's 16.2 price-to-earnings ratio estimate for the S&P 500. Only two of the 11 sector SPDR ETFs are expected to be pricier this year than XLP, according to AltaVista.

...But It's Worth The Price

But investors are compensated in the form of some of the most dependable dividend payers on the market, including Procter & Gamble Co (NYSE:PG), PepsiCo, Inc. (NYSE:PEP) and General Mills, Inc. (NYSE:GIS). Those venerable dividend names and others help drive XLP's yield north of 2.5 percent. It is the staples sector's dividends that keep investors coming back for seconds.

Morningstar's equity analysts believe that what drove staples firms' performance last year is the same dynamic that has fueled their valuations during the ultralow-interest-rate environment of the past few years: The sector's healthy dividends have capturedthe interest of income-seeking investors, said Morningstar in a recent note.

Like XLU and an array of real estate ETFs, XLP and friends are benefiting from declining Treasury yields, because the staples sector is seen as sensitive to rising rates.

Historically, consumer staples stocks have been sensitive to interest-rate hikes because most staples firms can't grow their earnings fast enough during economic expansions to offset the negative impact of rising rates. However, during this most recent expansion, rates have remained at historically low levels. Meanwhile, staples firms have enjoyed robust cash flows stemming from U.S. growth, a slow recovery in Europe, and cost-cutting measures. The upshot in 2015 was that staples firms were generally sporting dividend yields in the 2.5 percent - 3.0 percent range, even as their stock prices rose. In fact, XLP's dividend grew 9.5 percent in 2015, added Morningstar.

XLP is the largest consumer staples with just over $10 billion in assets under management. The ETF tracks the Consumer Staples Select Sector Index, a capitalization-weighted benchmark. Since it is a cap-weighted ETF, XLP is dominated by the largest staples names, such as P&G and The Coca-Cola Co (NYSE:KO).

Disclosure: Todd Shriber owns shares of General Mills.

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