Whether you have a job or not, you still need toothpaste, basic foods and toilet paper. That’s what positions the consumer staples sector to weather downturns better than most sectors. As consumers get in the habit of shopping again, consumer staples ETFs could be a good bet.
Demand for consumer staples not only tends to remain fairly elevated, but certain areas, like discount foods, liquor and tobacco, tend to even seen increased demand during slower periods. Michael Schmidt for Investopedia reports that the non-cyclical nature of this sector is why it shows a low correlation to the rest of the market, thus presenting less volatility.
Consumer staples are also unique in that their demand picture doesn’t change even as their prices do. There are no substitutes for the products themselves; however, consumers certainly have their choices among suppliers.
There are three major elements to consider when looking at the consumer staples sector:
- Price Reduction. Any price differentiation will be much more apparent during slower economic times when consumers steer toward the low-end retailers.
- Cost Reduction. Companies in the business of consumer staples can grow their profits and ultimately their stock price by reducing costs. Reducing their commodities cost also helps.
- Product Differentiation. From cars to razors, each consumer product company tries to differentiate its product as superior in order to increase demand and give the company the ability to control the item’s price.
What does this mean for investors? Slow and steady growth in these companies is what you are aiming for and what many investors find appealing about this sector. Consumer staples move in structured patterns that can be appealing for those looking for more stability than risk.
- SPDR S&P Retail (NYSEARCA:XRT)
- Vanguard Consumer Staples ETF (NYSEARCA:VDC)
- PowerShares Dynamic Consumer Staples (NYSEARCA:PSL)