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Consumer staples stocks have always been known as stalwart anchors for the majority of dividend equity portfolios. These companies provide essential products and services to consumers that are often thought to be insulated from the threat of a slowing economy. Think diapers, cigarettes, soda, and drugstores if you want to picture a sector that is known for its inelastic demand and built in consumer base.

For those reasons alone, consumer staples have long been known as a defensive sector that investors flock to when the broader market gets volatile. When you combine those qualities with the fact that many of these stocks have above average dividend yields and lower historical price fluctuations, you get a cross section of companies that are a perfect hiding place for conservative investors.

However, this year consumer staples appear to be leading the market lower rather than providing the protection that most investors have come to expect.

The largest exchange-traded fund that tracks this space is the Consumer Staples Select Sector SPDR (NYSEARCA:XLP). This ETF holds over $5 billion in 42 large-cap stocks that are primarily engaged in food and staples retail, household products, and beverages. The three largest holdings include: Procter & Gamble (NYSE:PG), Coca-Cola Company (NYSE:KO), and Philip Morris International (NYSE:PM). In fact, because of the market cap weighting of the underlying index, these three stocks make up over 31% of the total holdings in XLP.

When you take a closer look at these three top holdings you can see that they have been falling short over the last six months.

Procter & Gamble recently reported earnings that dropped from the same period last year and revenues were flat despite beating Wall Street expectations. Philip Morris has been in a similar slump with profits being reported lower than last year and its forward guidance being adjusted down accordingly. Coca-Cola recently made a splash by announcing a strategic investment and partnership in Green Mountain Coffee Roasters (NASDAQ:GMCR), but its stock price has not moved significantly in response. These are troubling signs that point to a potential stall in overall growth when compared to the broader market.

From high to low this year, XLP lost over 7% of its value but recovered about half of that drop on the latest bounce. In addition, this ETF broke below its 200-day moving average for the first time in over a year. That long-term trend line is often regarded as a significant technical level that can signal a change in momentum is afoot.

The question you should be asking yourself is whether to continue holding these defensive stocks or step off for greener pastures?

The answer to that question is largely a function of where you sit. If you have been holding this ETF or similar consumer staples stocks for a long period of time and expect this is just a short-term blip then you should continue to hold the position. On the other hand, if you have been unimpressed with the recent results and are considering making a switch you may be better off choosing a different fund to rotate into.

One ETF to consider is the First Trust Consumer Staples AlphaDEX Fund (NYSEARCA:FXG). This ETF is based on a fundamentally driven index that selects stocks based on their recent price momentum, book value, sales growth, and cash flow. It then weights the stocks according to the companies with the highest overall scores based on these metrics. What you are left with is a fund with approximately 38 holdings that is reconstituted quarterly.

The stocks within FXG are culled from the broader Russell 1000 Index so you get a subset of small and mid-cap companies in addition to large-cap names. As of the most recent data, this ETF has over 40% of its holdings in the food products industry and its two largest company weights are Constellation Brands (NYSE:STZ) and Tyson Foods (NYSE:TSN).

The results of this fundamental strategy have been impressive. Over the last 1, 3, and 5-years FXG has significantly outperformed the S&P 500 Consumer Staples Index as you can see in the table below.

1 Year

3 Year

5 Year

FXG Market Price

42.09%

20.66%

21.73%

S&P 500 Consumer Staples Index

26.14%

16.78%

15.86%

*Data as of 12/31/13 via ftportfolios.com

The drawback to a smart-beta ETF like FXG is that it has a significantly higher expense ratio of 0.70% when compared to the miserly 0.16% fee of XLP. In addition, this ETF only sports a 30-day SEC yield of 1.15% which is less than half of the 2.57% annual dividend stream from XLP. Those factors should certainly be taken into consideration given your individual preferences and portfolio goals.

In my opinion, consumer staples should still be represented in your portfolio and any pullbacks can be used to add to core holdings or shift to new opportunities. These stocks may still revert to their traditional role as a defensive sector if we see additional volatility come into play this year. However, I would caution that it's always a good idea to implement a stop loss or sell discipline on any new position in the portfolio to guard against the potential of a reversal in price.

Source: How To Play Lagging Consumer Staples Stocks

Additional disclosure: David Fabian, FMD Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.