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Barchart.com ETF ResearchBarchart.com's ETF Picks for the Consumer Sector ETF Research written by the Barchart.com ETF Research Team Last Updated: September 26, Table of Contents
IntroductionConsumer companies are split into two top-level sectors by the Global Industry Classification Standard (GICS): Consumer Staples and Consumer Discretionary. The difference between the two is that Consumer Staples are products that consumers “need” such as food and household products and Consumer Discretionary are products and services that people “want” such as restaurants, entertainment, and vehicles. The Consumer Staples sector is then broken down into three Industry Groups: (1) Food and Staples Retailing, (2) Food, Beverage & Tobacco, and (3) Household & Personal Products. Leading companies in the Consumer Staples sector, for example, include companies such as Proctor & Gamble, Philip Morris, Walmart, Coca-Cola, and Kraft Foods. The Consumer Discretionary sector is broken down into five Industry Groups: (1) Automobiles & Components, (2) Consumer Durables & Apparel, (3) Consumer Services, (4) Media, and (5) Retailing. Leading companies in the Consumer Discretionary sector, for example, include McDonalds, Amazon, Comcast, Walt Disney, and Home Depot. We will first cover the Consumer Staples ETF sector and then move on to the Consumer Discretionary sector.
U.S. Consumer Staple ETFsConsumer Staples Select Sector SPDR Fund (XLP) (issuer web site link) – This fund, launched in December 1998, has $5 billion in assets under management. The fund has an expense fee of 0.20%. The fund tracks the Consumer Staples Sector Index. The fund holds 44 U.S.-listed stocks. The five top holdings are: Procter & Gamble (14.4%), Philip Morris International (9.9%), Walmart (8.3%), Coca-Cola (7.7%), and Kraft Foods (5.0%). Vanguard Consumer Staples ETF (VDC) (issuer web site link) – This fund, launched in January 2004, has $800 million in assets under management. The fund has an expense fee of 0.24%. The fund tracks the S&P Developed Ex-U.S. BMI Consumer Staples Sector Index. The fund holds 108 U.S.-listed stocks. The five top holdings are: Procter & Gamble (12.4%), Coca-Cola (9.5%), Philip Morris International (8.1%), PepsiCo (7.5%), and Walmart (7.0%). iShares Dow Jones U.S. Consumer Goods Sector Index Fund (IYK) (issuer web site link) – This fund, launched in June 2000, has $373 million in assets under management. The fund has an expense fee of 0.47%. The fund tracks the Dow Jones U.S. Consumer Goods Sector Index. The fund holds 60 U.S.-listed stocks. The five top holdings are: Procter & Gamble (12.6%), Coca-Cola (10.7%), Philip Morris International (8.7%), PepsiCo (7.1%), and Kraft Foods (4.0%). First Trust Consumer Staples AlphaDEX Fund (FXG) (issuer web site link) – This fund, launched in May 2007, has $182 million in assets under management. The fund has an expense fee of 0.70%. The fund tracks the StrataQuant Consumer Staples Sector Index. The fund holds 36 U.S.-listed stocks. The five top holdings are: Green Mountain Coffee (6.3%), Herbalife (4.9%), Bunge Limited (4.6%), Archer-Daniels Midland (4.6%), and Smithfield Foods (4.5%). PowerShares Dynamic Consumer Staples Sector Portfolio (PSL) (issuer web site link) – This fund, launched in October 2006, has $38 million in assets under management. The fund has an expense fee of 0.65%. The fund tracks the Dynamic Consumer Staples Sector Intellidex Index. The fund holds 60 U.S.-listed stocks. The five top holdings are: CVS (2.6%), Walgreen Co (2.6%), Costco (2.5%), Colgate-Palmolive (2.5%), and Reynolds American (2.5%). Rydex S&P Equal Weight Consumer Staples ETF (RHS) (issuer web site link) – This fund, launched in November 2006, has $24 million in assets under management. The fund has an expense fee of 0.50%. The fund tracks the S&P 500 Equal Weight Consumer Staples Index. The fund holds 41 U.S.-listed stocks. The five top holdings are: Whole Foods (3.0%), Mead Johnson Nutrition (2.9%), Coca-Cola (2.7%), Colgate-Palmolive (2.6%), and Hershey (2.6%). PowerShares S&P SmallCap Consumer Staples Portfolio (PSCC) (issuer web site link) – This fund, launched in April 2010, has $9 million in assets under management. The fund has an expense fee of 0.29%. The fund tracks the S&P SmallCap 600 Capped Consumer Staples Index. The fund holds 23 U.S.-listed stocks. The five top holdings are: TreeHouse Foods (10.4%), United Natural Foods (9.9%), Darling International (9.7%), Casey’s General Stores (9.3%), and Diamond Foods (7.0%).
Consumer Staples – Leveraged Long and Short ETFsProShares provides a double-long and double-short ETF in each of the Consumer Services and Consumer Goods sectors. However, these ETFs have minimal assets under management and we therefore advise investors to steer clear of them due to questions about their longevity. ProShares UltraShort Consumer Services (-2X) (SCC) (issuer web site link) – This fund, launched in January 2007, has $14 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks the Dow Jones U.S. Consumer Services Index. ProShares UltraShort Consumer Goods (-2X) (SZK) (issuer web site link) – This fund, launched in January 2007, has $5 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks the Dow Jones U.S. Consumer Goods Index. ProShares Ultra Consumer Services (2X) (UCC) (issuer web site link) – This fund, launched in January 2007, has $11 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks the Dow Jones U.S. Consumer Services Index. ProShares Ultra Consumer Goods (2X) (UGE) (issuer web site link) – This fund, launched in January 2007, has $11 million in assets under management. The fund has an expense fee of 0.95%. The fund tracks the Dow Jones U.S. Consumer Goods Index. Figure 1: Comparison of Vanguard Consumer Staples ETF (VDC), Consumer Staples Select Sector SPDR Fund (XLP), and iShares Dow Jones U. S. Consumer Goods Sector Index Fund (IYK) (live chart link)
Our Pick in the U.S. Consumer Staples ETF Group -- Our pick for the U.S. Consumer Staples group is the Vanguard Consumer Staples ETF (VDC) based on its superior performance on both the monthly and weekly charts as compared with its two main competitors, Consumer Staples Select Sector SPDR Fund (XLP), and iShares Dow Jones U. S. Consumer Goods Sector Index Fund (IYK). Vanguard’s VDC has $800 million in assets under management, which is far less than the $5 billion in the SPDR XLP, but $800 million in assets is more than enough to provide liquidity and narrow bid-offer spreads. Vanguard’s VDC has an expense fee of 0.24% that is higher than the 0.20% fee of SPRD’s XLP, but the outperformance of Vanguard’s VDC in our view more than makes up for its slightly higher fee. We also like Vanguard’s VDC because it holds 108 stocks versus 44 for SPDR’s XLP, which makes it more diversified, less subject to single-company risk, and provides more exposure to smaller cap stocks. Global Consumer Staples ETFsiShares S&P Global Consumer Staples Index Fund (KXI) (issuer web site link) – This fund, launched in September 2006, has $391 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the S&P Global Consumer Staples Index. The fund holds 101 U.S.-listed stocks. The five top holdings are: Nestle (8.1%), Procter & Gamble (7.3%), Coca-Cola (6.7%), Philip Morris (5.1%), and Walmart (4.2%). iShare MSCI ACWI ex-U.S. Consumer Staples Sector Index Fund (AXSL) (issuer web site link) – This fund, launched in July 2010, has $3 million in assets under management. The fund has an expense fee of 0.48%. The fund tracks the MSCI All Country World ex USA Consumer Staples Index. The fund holds 111 globally-listed stocks. The five top holdings are: Nestle (15.1%), British American Tobacco (6.2%), Unilever (4.0%), Diageo (3.6%), and Tesco (3.5%). Figure 2: Comparison of Vanguard Consumer Staples ETF (VDC) and iShares S&P Global Consumer Staples Index Fund (KXI) (live chart link)
Our Pick for the Global Consumer Staples ETF Group – Our pick for this group is the iShares S&P Global Consumer Staples Index Fund (KXI) since it is the only ETF in the group of substantial size. However, the question then becomes whether an investor who is looking for exposure to the consumer staples sector should invest in our U.S. pick of the Vanguard Consumer Staples ETF (VDC) or our global pick of iShares S&P Global Consumer Staples Index Fund (KXI). On a head-to-head comparison basis, Vanguard’s VDC has outperformed the iShares KXI on both the monthly chart (see Figure 2) and weekly chart. On the criteria of only past historical performance, the choice would be the Vanguard VDC over the iShares KXI. However, there is no guarantee that the superior performance of Vanguard’s VDC will continue. This is a close call, but for our money we would choose the iShares KXI because of our strong belief in the global development theme and our desire to get maximum exposure to the global consumer rather than a narrower focus only on U.S. consumers.
Emerging Market Consumer ETFsDow Jones Emerging Markets Consumer Titans Index Fund (ECON) (issuer web site link) – This fund, launched in September 2010, has $240 million in assets under management. The fund has an expense fee of 0.85%. The fund tracks the Dow Jones Emerging Markets Consumer Titans Index. The fund holds 30 globally-listed stocks. The five top holdings are: Cia de Bebidas das Americas (10.3%), Walmart of Mexico (7.0%), Naspers (6.0%), ITC (5.8%), and Astra International (5.8%). The country weights as of June 30, 2011 were as follows according to the ETFs web site: Mexico 19.9%, Brazil 17.4%, South Africa 13.6%, India 12.7%, Chile 10.7%, Malaysia 7.0%, China 6.4%, Indonesia 5.8%, Russia 4.9%, and Colombia 1.5%. Global X China Consumer ETF (CHIQ) (issuer web site link) – This fund, launched in November 2009, has $160 million in assets under management. The fund has an expense fee of 0.65%. The fund tracks the Solactive China Consumer Index. The fund holds the stocks of 40 companies based in China. The five top holdings are: Gome Electrical (6.3%), Tingyi Holding (6.2%), Hengan International (5.8%), New Oriental (5.7%), and Want Want China Holdings (5.6%). Our Pick for the Emerging Country Consumer ETF group – The investment theme of emerging market consumers can be very attractive since consumers in key emerging countries such as China and Brazil and are on a rapid path of increasing income and wealth, as opposed to consumers in developed countries who are generally stuck in a slow or no growth mode. Demand in emerging countries is growing rapidly for a wide variety of consumer products including food, beverages, household products, clothes, appliances, electronics, and vehicles. Many of these consumers buy domestic brands and products and therefore the global consumer companies such as Unilever and Proctor & Gamble do not necessarily provide the targeted domestic-country investment that is necessary to gain exposure to emerging market consumers. With our strong belief in the theme of global development, we are fans of devoting some investment capital to the theme of the emerging market consumer. However, given the current world economic and financial problems, we would keep this investment small and adopt a long-term investment horizon in order to give the world economy time to regain its balance. The largest ETF in this group is the Dow Jones Emerging Markets Consumer Titans Index Fund (ECON), which currently has $240 million in assets under management. This ETF provides one way to play the emerging market consumer and has enough assets under management to provide some confidence about its longevity. However, the ETF has only 30 stocks and we would quibble about the fund’s country weighting methodology, which puts a relatively large weight on Mexico at 19.9% but only 12.7% on India and 6.4% on China. For our money, we would like to have substantially more exposure to China than to Mexico, for example. One way to remedy this situation is to create a mini-portfolio of emerging country consumer ETFs and stocks. For example, an investor who would like to devote say $2000 to this investment theme could buy $1,000 of ECON and then use the other $1,000 to buy the Global X China Consumer ETF (CHIQ). This would boost the overall weight of China in the portfolio to 53% and reduce the weights to 10% for Mexico, 8% for Brazil, 7% for South Africa, 6% for India, and less than 5% for the other countries in ECON. The weights could be further adjusted by buying individual emerging market consumer stocks in the countries in which more exposure is desired.
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