Staples ETFs Rally: Here's Why It Can Continue

Considering that it is home to some of the sleepiest stocks on the market and that it is merely the fifth-largest sector weight in the S&P 500, the consumer staples group has sure been on the receiving end of a lot of attention.

Perhaps part of the reason is that some folks are having a hard time digesting the notion of staples playing a leadership role as U.S. stocks ascend to record highs. Fair enough. After all, it is reasonable to assume that the rally would have fewer doubting Thomases if sectors such as materials and technology were doing the leading.

More recently, questions over staples' viability as a leadership sector have turned into musings about a potential bubble. Again, it is a legitimate issue to mull with the Consumer Staples Select Sector SPDR (NYSE:XLP) and the Vanguard Consumer Staples (NYSE:VDC) both up more than 20 percent year-to-date.

However, just because folks are pontificating about a staples bubble does not mean one materialize in the near-term. In fact, there are several reasons why the consumer staples rally can keep going.

The Rally Has Already Proven Durable Meaning, the staples rally has already proven durable. In fact, rallying staples stocks is nothing new. Going back to March 2010, XLP has been the second-best performing sector SPDR. Only the Consumer Discretionary Select SPDR (NYSE:XLY) has been better than XLP.

Since March 29, 2010, XLP has nearly tripled the returns of the Financial Select Sector SPDR (NYSE:XLF) and more than doubled the returns of the Materials Select SPDR (NYSE:XLB). One can make of that what one will, but the reality is staples as a leadership group is a concept that is at least three years old.

Seen It Before In the 2004-2007 bull market, the SPDR S&P 500 (NYSE:SPY) gained 41.4 percent, returns that trailed XLP by 310 basis points. From January 2, 2004 through December 31, 2007, four sector SPDRs performed better than XLP: The Energy Select Sector SPDR (NYSE:XLE), the Industrial Select Sector SPDR (NYSE:XLI), the Utilities Select SPDR (NYSE:XLU) and the aforementioned XLB.

Over that time, XLP offered nearly double the returns of the Healthcare Select Sector SPDR (NYSE:XLV) and better than triple the returns of XLF. XLP also outpaced XLY. Regarding XLP's 2004-2007 performance, it is "middle of the pack" among the sector ETFs mentioned here. However, it was good enough to outpace some higher beta sector ETFs such as XLF.

Throw in the impressive 2004-2007 run for XLU and the current environment is not the first time in recent memory investors have seen low beta sectors outperform SPY on the way up.

Investors Love Low Beta Speaking of low beta, investors love the concept of reduced beta/minimum volatility. Year-to-date inflows to so called "low vol" ETFs prove that point. In the first quarter, minimum volatility exchange traded products raked in $4.1 billion in new assets, or an average of $1.4 billion per month. That is more than triple the average monthly inflow seen to these ETFs last year, according to iShares data.

ETFs such as the PowerShares S&P 500 Low Volatility Portfolio (NYSE:SPLV) and the iShares MSCI USA Minimum Volatility Index Fund (NYSE:USMV) are, not surprisingly, heavy on staples, health care and utilities names. Whether it is through individual stocks or via low vol ETFs, investors are expressing plenty of affection towards low volatility sectors.

Combined, SPLV and USMV have about $7 billion in assets. That is hardly enough to bandy about favorite Wall Street buzz phrases such as "crowded traded" or "bubble."

Commodities Costs Here's an anecdotal example that is worth noting: A box of Honey Nut Chex made by General Mills (NYSE:GIS) contains whole grain corn, cornmeal and sugar. Year-to-date, the Teucrium Corn Fund (NYSE:CORN) is down more than nine percent. The iPath DJ-UBS Sugar TR Sub-Index ETN (NYSE:SGG) is off more than 10 percent.

Other constituents in XLP and VDC make products with corn, coffee, chocolate, sugar and wheat. Good news: The average year-to-date performance for the Teucrium Wheat Fund (NYSE:WEAT), the iPath DJ-UBS Cocoa TR Sub-Idx ETN (NYSE:NIB) and the iPath DJ-UBS Coffee TR Sub-Index ETN (NYSE:JO) is a loss of about nine percent. Should these prices continue to slide, staples producers could get the benefit of lower input costs later this year.

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