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Here's Why You Should Invest in Consumer Staples ETFs

Wall Street has had a rough start to 2022 as continued weakness is being observed on the bourses. The Dow Jones Industrial Average lost 1.5% on Jan 18. The other two broad market indices, the S&P 500 and the Nasdaq composite, also declined 1.8% and 2.6%, respectively on the same day. In fact, the tech-heavy Nasdaq Composite touched its lowest level in three months on Jan 18. For the first time since April 2020, the Nasdaq Composite closed below its 200-day moving average yesterday. Also, the small-cap benchmark Russell 2000 declined about 3.1%.

The reason for this tech market slowdown can essentially be the soaring benchmark 10-year Treasury yields, which went up as high as above 1.87% on Jan 18. Growth sectors like the tech space have been feeling the pain of rising bond yields as the same decreases the relative value of future earnings, making the popular stocks seem overvalued. Tech companies also face hurdles in funding their growth and buying back stocks due to higher rates (per a CNBC article).

High inflation levels continue to be a serious concern for Americans. Once again, the latest inflation data demonstrates the metrics’ record-high levels. The Federal Reserve has also hinted at taking aggressive measures to manage rising inflation levels. It is expected to begin raising its benchmark interest rate in March. In fact, Goldman Sachs is expecting the Federal Reserve to increase interest rates four times this year, according to a CNBC article.

In this regard, Kathy Bostjancic, the chief U.S. financial market economist at Oxford Economics commented that “The bond market is continuing to price in a more aggressive policy tightening by Federal Reserve based on still-high inflation and the Fed’s more hawkish guidance,” per a CNBC article.

Certain other factors are clouding the U.S. investment market. Investors are waiting for the fourth-quarter results and the outlook to be presented by corporate America for 2022.

The release of certain disappointing economic data releases is also raising concerns. For starters, the latest data on U.S. industrial output appears to be disappointing as aggravating COVID-19 cases due to the Omicron variant are affecting the recovery of the U.S. economy. Per the Fed’s recently-released data, total industrial production decreased 0.1% in December. A 0.3% decline in manufacturing output compared unfavorably with a revised rise of 0.6% in November. There was a 1.5% fall in utility production. Meanwhile, mining production witnessed a 2% gain mainly due to strength in the oil and gas sector. U.S. retail sales also slid 1.9% sequentially in December, marking the biggest fall since February 2021 and ending four successive months of strong growth.

Moreover, U.S. consumers are feeling the heat of continuously rising inflation levels. The latest disappointing preliminary consumer sentiment readings for early January that have slipped to the second-lowest level in a decade highlight the same. The University of Michigan’s preliminary consumer sentiment declined to 68.8 in early January from 70.6 last month. The metric lagged the market forecast of a fall to 70.0, per the Reuters survey on economists.

Consumer Staples ETFs to Watch

The consumer staples sector is known for its non-cyclical nature and acts as a safe haven amid unstable market conditions. Moreover, like utility, consumer staples is considered a stable sector for the long term as its players are likely to offer decent returns.

Investors can consider parking their money in the non-cyclical consumer staples sector during an economic recession. This high-quality sector, which is largely defensive, has a low correlation factor with economic cycles.

Research shows that consumer staples companies mostly outperform in times of market turbulence. Thus, the space generally acts as a safe haven for investors. Moreover, consumer staples stocks have more stable profit levels in a contracting economy.

Here we highlight certain ETFs that can be safe bets (see: all Consumer Staples ETFs here):

The Consumer Staples Select Sector SPDR Fund XLP

The Consumer Staples Select Sector SPDR Fund seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the Consumer Staples Select Sector Index. With AUM of $14.14 billion, XLP has an expense ratio of 12 basis points (bps).

Vanguard Consumer Staples ETF VDC

Vanguard Consumer Staples ETF seeks to track the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. With AUM of $6.70 billion, VDC has an expense ratio of 10 bps (read: 5 Defensive ETF Bets for Dealing With Fed Rate Hike Woes).

Fidelity MSCI Consumer Staples Index ETF FSTA

Fidelity MSCI Consumer Staples Index ETF seeks to provide investment returns that correspond, before fees and expenses, generally to the performance of the MSCI USA IMI Consumer Staples Index. FSTA has an AUM of $934.1 million and charges 8 bps in fees.

iShares U.S. Consumer Staples ETF IYK

iShares U.S. Consumer Staples ETF seeks to track the investment results of an index composed of U.S. equities in the consumer staples sector. IYK has an AUM of $782.4 million and charges 41 bps in fees (read: 5 Best-Performing ETFs of December).

First Trust Consumer Staples AlphaDEX Fund FXG

First Trust Consumer Staples AlphaDEX Fund seeks investment results that generally correspond to the price and yield, before fees and expenses, of an equity index called the StrataQuant Consumer Staples Index. With AUM of $324.4 million, FXG has an expense ratio of 64 bps.


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Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
 
First Trust Consumer Staples AlphaDEX ETF (FXG): ETF Research Reports
 
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
 
iShares U.S. Consumer Staples ETF (IYK): ETF Research Reports
 
Fidelity MSCI Consumer Staples Index ETF (FSTA): ETF Research Reports
 
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