Worried About a Slow Economy? Play Defense With This ETF

In this segment fromIndustry Focus: Consumer Goods, the cast discusses the Consumer Staples Select Sector Fund (NYSEMKT: XLP). This sector-based exchange-traded fund (ETF) tracks the performance of consumer staples companies in the S&P 500, with holdings in major names likeProcter and Gambleand Coca-Cola. Find out why this fund is favored by those who seek to add "defensive" investments to their portfolios.

A full transcript follows the video.

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This podcast was recorded on Nov. 29, 2016.

Vincent Shen: Moving on to the second fund we have, the XLP, this is for the consumer staples. It's been around since 1998. This one is a bit smaller in terms of its holdings. It has 39 constituents. The mean market cap is quite a bit larger, and you'll understand that once you hear the companies that make up the top 10 holdings. The mean market cap I have here is $56 billion. The top three holdings [are] Procter & Gamble, Coca-Cola, Philip Morris. Beyond that, Altria, Wal-Mart Stores, CVS Health Corporation. These are very much some of the biggest names out there within our consumer retail world. It makes sense, if its name, in terms of staples being, regardless of what the economic climate might be, they are not nearly as affected, these are still stores and brands that you are purchasing from on a day-to-day basis. That sound about right, Asit?

Asit Sharma: Yeah. What I find fascinating, Vince, about this is that the people who construct the indexes and put stocks in the sectors have determined that cigarettes, soft drinks, as well as household goods, are staples. You can't do without your soft drinks. They didn't put Coca-Cola in the discretionary funds, they put it in the staples fund, and same with Philip Morris. I guess that is true, and it's based on a lot of observation over the decades. I think it's a great point you make, Vince -- these are household items. Unlike the discretionary fund, which has the more exciting stocks -- e-commerce -- these are characteristic of a defensive play in the market. If you believe, as opposed to discretionary ETFs, which will rise when discretionary income rises, when the economy is expanding, if you are pessimistic about the economy, you might want to buy this ETF and play defense a little bit.

I wanted to point out the total return of the two versus the S&P 500. Looking at that first ETF, the XLY, the consumer discretionary fund, that has done, over the last five years -- so, this is post-Great Recession -- about 16.8% per year on average. That's about 3% above the S&P 500. This is on a total return basis. The XLP, the consumer staples fund, has averaged about 14.5%, right about 1% better in terms of performance than the S&P 500 over the past few years. So, not quite as great performance. But if you envision the economy slowing down, those numbers might flip, and this might be the more popular ETF investment. Again, going back to our theme about how you can use these ETFs to divide the consumer goods world -- this is a very big-picture way to break it up -- are you playing defense or offense? When we talk about the staples side of things, we're playing defense.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.