In a year where U.S. equity returns are lackluster, consumer staples exchange-traded funds are among the worst performers in 2018.
Of the 10 Sector SPDRs ETFs, the Consumer Staples Select Sector SPDR Fund (XLP) is the weakest of the group with a year-to-date loss of 11.3 percent. Comparably, the SPDR S&P 500 Index Trust (SPY) is down 0.8 percent. Furthermore, fund category year-to-date returns show consumer defensive stocks are down 6.4 percent, with only real estate weaker with a negative return of 8.3 percent, according to Morningstar.
XLP, the biggest consumer staples fund by assets under management, at $7.5 billion, isn’t the only laggard in its class. The next biggest by AUM, the iShares Global Consumer Staples ETF (KXI), which follows the S&P Global Consumer Staples Sector Index Fund, is down 8.36 percent year-to-date. This shows that the weakness in the sector isn’t just limited to the U.S.
And you can’t blame 2018’s sluggish broad equity performance for consumer staples’ weakness, as both XLP and KXI were down in 2017. Indeed, SPY returned 15.4 percent last year versus XLP’s loss of 2.09 percent and KXI’s slight gain of 0.82 percent. XLP and KXI have also underperformed SPY on an annualized three-year basis.
What’s causing the weakness? An April research note from Morgan Stanley suggests the consumer packaged goods and household products sector is seeing a secular slowdown as U.S. pricing power diminishes and commodities prices rise. Morgan Stanley analysts say consumer preferences are shifting away from larger, established brands to smaller brands that offer more local, personalized and/or natural attributes.
Another factor is the Amazon effect. Namely, traditional retailers who are seeing their own margin pressure due to the forces of e-commerce are putting pressure on the Procter & Gambles of the world to lower their prices.
Both XLP and KXI contain large consumer staple brands and physical retailers.
The top holdings in XLP include Procter & Gamble (11 percent), Coca-Cola (10 percent) and PepsiCo (9 percent), with Walmart in the top five at 7.5 percent.
Top holdings in KXI include Nestle (7 percent), Procter & Gamble (6 percent) and Coca-Cola (5 percent). Walmart is a top-10 holding at 3.7 percent.
Two other issues may be hindering consumer staples aside from changing consumer choices and retailer woes, says Brett Manning, senior market analyst at Briefing.com. Regarding last year’s underperformance to the broader market, he says consumer staples suffered because of the low market volatility and higher risk appetite in equities.